August 2009 Market Recap
Upsurge continues
· Stocks extended their strong midyear rally in August, regaining levels last touched in October 2008.
· A resurgence of activity in the housing arena provided a boost during the month, as buyers eagerly took advantage of government incentives.
· The beleaguered automotive industry received a much-needed jump-start from the “Cash for Clunkers” program.
Stocks extend rally
Financial stocks—particularly bank stocks—led the charge in August.
· The Dow Jones Industrial Average (DJIA) posted a 3.97-percent monthly return.
· The Standard & Poor’s 500 (S&P) gained 3.61 percent.
· The more technology-heavy Nasdaq Composite Index saw a milder increase of 1.54 percent.
· Year-to-date, these indices are now up 10.79 percent, 14.97 percent, and 27.40 percent, respectively.
Investors have shown an even greater appetite for overseas stocks.
· The MSCI EAFE Index returned 5.45 percent in August and now boasts a 24.78-percent gain year-to-date.
· The MSCI Emerging Markets Index, on the other hand, actually fell slightly, by 0.33 percent last month, as investors began to question the sustainability of growth in these still developing economies.
o In China, for example, where the validity of government statistics is sometimes questioned, investors fretted over the magnitude of government stimulus being employed, causing the Shanghai SE Composite to plummet 21.81 percent in August.
Optimism reigns
Skeptics were relegated to the background last month, as economic reports seemed to suggest that a global economic recovery is upon us.
Housing:
· The National Association of Realtors’ pending home sales index rose to its highest level since June 2007.
· Sales of existing single-family homes have now increased for four consecutive months—the longest streak since mid-2004.
Manufacturing:
· The Institute of Supply Chain Management’s index of factory activity rose to 52.9 last month, indicating the first expansion in manufacturing since January 2008.
· Spurred by the Cash for Clunkers program, automakers Ford and General Motors saw August sales increase by 11 percent and 30 percent, respectively, compared with July.
· Overseas, measures of Chinese manufacturing activity rose to a 16-month high, and Eurozone manufacturing, though still exhibiting a slight decline, was much better than predicted.
Where to next?
· Some forecasters think this is the beginning of a sustained new growth phase and believe the recent recession is behind us.
· Others assert that structural weaknesses in the economy remain and that much of the recent good news can be attributed to quite ephemeral forces, such as:
o The government push to spur home and auto sales
o The cost-cutting initiatives that allowed many companies to beat second-quarter earnings expectations
· They fear that investor enthusiasm has raced ahead of the economic reality and that, should those stimulative forces abate, the economy and financial markets could sputter anew.
· Those concerns seem out of step at present, however; recent indicators are siding with the optimists.
Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures all Nasdaq domestic and non-U.S.-based common stocks listed on the Nasdaq Stock Market. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Shanghai Stock Exchange Composite Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange.
Authored by John Blood, CFA®, CFP®, chief market strategist, at Commonwealth Financial Network.
© 2009 Commonwealth Financial Network®
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