Frazier Allen: Domestic Stocks Hit All-Time Highs in August

Clarksville, TN – As summer comes to a close, the markets – as represented by the Dow Jones Industrial Average, Nasdaq Composite and the S&P 500 – reached new highs during August, putting all three major indices in uncharted territory.

Steady economic growth, rising consumer spending and improving corporate earnings coming in better than expected were all key factors in helping drive the market.

Market

Performance reflects price returns as of 4:15 p.m. EDT on August 31, 2016.

Below are additional thoughts on the factors that are influencing the domestic and global markets.

Economy

• Real GDP rose at a 1.1% annual rate in the second estimate for 2Q16, but underlying domestic demand rose 3.0%.
• Following a drawdown in inventories in recent quarters, we should see a rebuild and better production numbers in the second half of the year.
• Consumer spending, which accounts for about 70% of GDP, has been trending at a relatively strong pace into 3Q16, supported by solid growth in wage income.
• Job growth is expected to slow in the months ahead as the labor market tightens.
• A September rate hike will be data dependent, but many Federal Reserve policymakers appear to be leaning toward raising rates sooner rather than later. After raising rates, monetary policy will still be very accommodative and rate increases over the next couple of years are expected to be very gradual.

Equity Markets

• As long as interest rates eventually rise as a result of improving fundamentals and economic data, it should bode well for the equity market as it transitions from an interest-rate-driven to an earnings-driven market.
• Earnings continue to come in better than expected with healthcare and technology leading the way.
• While oil prices dipped below $47 a barrel, energy exploration seems to have bottomed and the long-term outlook remains at $70+ per barrel, according to Raymond James energy analysts.
• In the near term, equity valuations are elevated, pointing to a potential pullback that could provide buying opportunities.

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Fixed Income

• Global investors continue to buy U.S. bonds, seeking both “safety” and positive yield.
• After Federal Reserve Chair Janet Yellen’s speech from Jackson Hole, Treasury yields ticked up briefly; a reaction to the stronger possibility of a September rate hike.
• Long-term rates in the U.S. have been affected by global central bank monetary policy, and the high of nearly $180 billion per month in quantitative easing (not including the Fed) is expected to surpass that number in 2017.
• Retail Fixed Income Strategist Benjamin Streed stresses that although Treasury yields remain near lows, bonds act as a portfolio diversifier and provide a ballast against equity markets, so investors should stick to their long-term strategic asset allocations.

Global

• Views are mixed on how much of a drag there will be on UK GDP growth post-Brexit, and uncertainty should restrain business fixed investment near term.
• The European Central Bank is primed to add a bit more support in September, so European asset prices also look perkier.
• Continued concerns with Chinese economic restructuring and weakness in Latin America.

Bottom Line

• The U.S. economy is expected to grow moderately, but a soft global economy will remain a restraint.

Your advisor will continue to monitor investment trends and the market environment, and share the most relevant information with you. In the meantime, please contact your advisor if you have any questions.

 

There is no assurance that any investment strategy will be successful. Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. and are subject to change. Past performance is not an indication of future results and there is no assurance that any of the forecasts mentioned will occur. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. It is not possible to invest directly in these indexes.

International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Investments in specific sectors and Small-cap stocks generally involve greater risks and are not appropriate for all investors. The market value of fixed income securities may be affected by several risks including interest rate risk, default or credit risk, and liquidity risk. A credit rating of a security is not a recommendation to buy, sell or hold securities and may be subject to review, revisions, suspension, reduction or withdrawal at any time by the assigning rating agency. The performance noted does not include fees or charges, which would reduce an investor’s returns. Asset allocation and diversification do not guarantee a profit nor protect against a loss. Material prepared by Raymond James for use by its advisors.