Market Commentary: September 2008
(To view charts in full resolution, download full commentary at right.) 


Capital Markets    

Heightened volatility has persisted now for over a year, during which time the market has been defined by a series of noteworthy events.  The domestic equity markets officially entered a bear market, the Federal Reserve took unprecedented actions to help stabilize the financial markets and restore liquidity, the housing market correction reached proportions last witnessed in the 1930s, and consumer sentiment reached multi-decade lows, among others. 

VIX - CBOE S&P Market Volatility Index – History

Source: Yahoo Finance

Although uncertainty persists surrounding housing, the credit markets, and inflation, some positive economic data released during August provided a thin silver lining, including easing energy costs, stronger than anticipated Q2 GDP growth, and a rise in the pace of home sales.


Source: PMFA

Domestic equity markets reported positive performance for the month.  Large cap equities continued to lag smaller caps largely due to the significant deterioration within the financial sector.  Small caps rallied again in August, as they re-traced back toward breakeven year-to-date.  International equities, while positive in local dollar terms, were negative for U.S.-based investors.  An appreciating greenback, while it has assisted in the recent curtailing of oil prices, diminished returns in international stocks once the relative currency conversion was accounted for. 


Source: PMFA

Domestic fixed income also reported positive performance in August.  Municipal bonds continued the relative outperformance of their taxable counterpart during the month as well as year-to-date.  High yield bonds were nominally positive, yet still negative on a year-to-date basis.  The U.S. Dollar rally was not exclusively against developed currencies.  Emerging market currencies also depreciated relative to the Dollar, which detracted from the performance of the JP Morgan ELMI+ index.


Source: PMFA

Commodities experienced another strongly negative month, led by precious metals and energy.  Since June, the Dow Jones AIG Commodity index has declined by nearly 20%.  Hedge funds, after maintaining flat performance year-to-date, reverted into negative territory in July.  REITs achieved a positive bump for the month but remain negative year-to-date. 

Economy

GDP

After a robust revision, the economy is now estimated to have grown at an annual rate of 3.3% in the second quarter.  The revision was an unusually high 1.4% increase from the advance estimate of 1.9%, reflecting a boost in both net exports and consumer spending.   

Real GDP & Personal Consumption – Quarterly % Change

Source: PMFA, Bureau of Economic Analysis (BEA)

With 98% of companies having reported earnings for Q2, the S&P 500 posted its fourth consecutive quarter of negative earnings this quarter at -29%.  As in recent quarters, the financial sector was a major contributor to this decline.   

S&P 500 Earnings & Nominal GDP – 12-Month % Change

Source: PMFA, Standard and Poors, BEA

Inflation

Inflation pressures have been mounting for nearly two years, and uncertainties surrounding the outlook for inflation persist.  The August data, while not yet released, is expected to ease moderately with the waning of energy prices.  Meanwhile, July’s surge in inflation was led by producer prices, which generally tend to be more volatile than other inflationary measures.  The one-year change in PPI, at 9.8%, is the highest in over 27 years.  One  underlying concern is whether producer prices will be passed through and impact core inflation over the long-term.  A sluggish economy will likely discourage this.   

Inflation Indices – 12-Month % Change
 
Source: PMFA, BEA, Bureau of Labor Statistics (BLS)

In July, the consumer price index (CPI) also ticked up by a sharp 0.5%.  The trailing one-year CPI now stands at 5.6%, a 17-year high.  The one-year change in the core PCE index reached 2.4%.  This remains outside of the Fed’s implied comfort range of 1%-2%. 

 
Source: PMFA, BEA, BLS

In their August 5 meeting minutes, the Fed’s projection for 2009 reiterated their expectation that core inflation will ease “as the impetus from prior increases in the prices of imports, energy, and other commodities abated and the margin of slack in resource use widened (sic).”  The slowdown in the global economy, already becoming evident, should further support their thesis.

Employment

The employment situation continued its deterioration in August, as job losses were reported for the eighth consecutive month.  Although the pace of job loss has been consistent, it remains more gradual than that reached during prior periods of economic slowdown.  The unemployment rate reached a 5-year high of 6.1% in August, as initial jobless claims ticked higher than expectations, reaching 444,000 for the final week of the month.  

Initial Jobless Claims & Unemployment Rate – Monthly

Source: PMFA, BLS

Interest Rates

The FOMC left the Fed Funds rate unchanged at their August meeting.  The Fed has continued to state that no further easing should be expected, despite the surprisingly weak recent job numbers and expectations for a further economic slowdown.  The futures market continues to price in expectations for rates to hold stable at 2.0% for the remainder of the year.

Current Probabilities for future FOMC Meetings

Source: PMFA, Bloomberg

The Treasury yield curve flattened marginally during the month, as the one-month yield rose just 8 basis points.  Conversely, longer term rates fell.  The 10-year Treasury yield declined 16 basis points, ending August at 3.83%.   

Treasury Yield Curve – History

Source: PMFA, U.S. Treasury

Currency

The recent bounce in the Dollar relative to a handful of developed currencies has helped to ease commodity prices.  This easing in commodity prices as a whole should also help inflationary measures to moderate. 

Commodity Research Bureau & US Broad Dollar Indices – History

Source: PMFA, Bloomberg
  



Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other source believed to be reliable. However, some or all information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis non-factual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.