Stocks, bonds post big gains for August

Worsening global headlines and a weaker than expected report on U.S. consumer spending and income failed to dampen investor moods on Friday, sending the major indexes to their best monthly gains since February.

The S&P 500 closed the month at another all-time high of 2003.37 following Friday’s 0.3% gain, ending the week with a 0.8% rise and 3.8% for August before dividends. All 10 sectors closed higher on Friday. The Dow, which rose 0.1% Friday and 0.6% for the week, ended August with a 3.2% increase in price. But NASDAQ had the best gain of the three major indexes, climbing 4.8% for the month and 0.9% for the week after Friday’s 0.5% advance.

U.S. Treasury bonds were little changed on Friday but yields were sharply lower than where they began the week and the month. The yield on the 10-year note ended the week at 2.34%, a 14-month low, down six basis points from the previous Friday and down 22 bps since the end of July, its biggest monthly drop since January. The 30-year bond ended the month at 3.08%, its lowest level since May of last year, down eight bps for the week and 24 bps for the month.

U.S. economic reports released Friday were a mixed bag following a week of mostly stronger than expected results, particularly in the housing sector.

  • Personal income and spending figures for July both came in lower than expected. Consumer spending fell 0.1% from a month earlier, down from June’s 0.4% increase and the first decline since January. That was well below the consensus forecast, which was expecting a 0.2% increase; no analyst forecast a decline. Personal income was also lower than expected, rising a weak 0.2% following 0.5% increases the previous two months. It was the smallest monthly increase this year. The personal consumption expenditures (PCE) price index rose 0.1% compared to the prior month and 1.6% versus a year ago, below the Federal Reserve’s 2% inflation target.
  • On the plus side, the University of Michigan’s consumer sentiment index rose to 82.5 at the end of August, two points better than forecast. That was up from 79.2 at mid-month and 81.8 at the end of July.
  • The Institute for Supply Management’s Chicago business barometer jumped to 64.3 for August from 52.6 in July, well above the consensus forecast of 56.4.

Despite worries about the Ukraine-Russia situation and a threatened terrorist attack in the U.K. and the continent, European shares were higher Friday as well as for the week and the month. The broad-based Stoxx Europe 600 rose 0.3% Friday; the index was up 1.6% for the week and 1.8% in August. The force driving stock prices higher this week was speculation that the euro zone’s stalled economic rebound would force the European Central Bank to enact more drastic stimulus measures, although it’s not clear how much lower it can drive interest rates that are already at historic lows and what additional benefit that would actually provide. On Friday the European Union’s statistics office said that consumer prices in the currency zone rose 0.3% in August, the weakest rate since October 2009, while unemployment held steady at 11.5%. Figures like that have driven rates on sovereign bonds to record low levels. The yield on the benchmark 10-year German bund, for example, ended Friday at 0.89%, down nine basis points on the week and down 27 bps for the month; it started the year at 1.93%.

Asian stocks, which have generally outperformed Western markets of late, were mixed on Friday and mostly lower for the week. The Shanghai composite rose a full 1% on Friday but still finished down 1.1% for the week. Hong Kong’s Hang Seng index was unchanged Friday, finishing down 1.5% for the week, while Japan’s Nikkei 225 finished with a 0.7% loss for the week after losing 0.2% Friday. India’s Sensex, however, managed a 0.8% for the week as Indian markets were closed Friday for a holiday.

Reports/dates/facts/links worth paying attention to over the next week:

  1. August 31: Markit/JMMA manufacturing PMI for Japan (August); Markit manufacturing PMI for China (August).
  2. September 1: Euro-zone manufacturing PMI survey for August; U.S. markets closed for Labor Day.
  3. September 2: ISM manufacturing purchasing managers’ survey (August); U.S. construction spending (July).
  4. September 3: ADP national employment report.
  5. September 4: ISM non-manufacturing purchasing managers’ survey (August); weekly unemployment claims.
  6. September 5: Labor Department report on unemployment and payrolls (August).

Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.

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