August Economic Update and Trends

U.S. economy showing improvement

After a slow start to the year, the U.S. economy has bounced back strongly, with an initial estimate of 4% GDP growth during the second quarter.  Strong signs from the manufacturing sector and six consecutive months of 200,000+ job gains have created a feeling of relative economic stability.  The same cannot be said globally, however, as Europe continues to struggle with setbacks such as Italy falling back into recession. Geopolitical concerns are also weighing heavily on global growth and consumer confidence.  Looking ahead, all eyes continue to be on the Federal Reserve and other central banks as businesses consider their future spending and hiring plans.

Bonds show relatively flat month in July

U.S. Treasury interest rates continued their gradual descent on the long end of the curve, but surprisingly began to push higher on government bonds with maturities of ten years or less. Investors digested a strong flow of positive economic information against the backdrop of expectations that the Federal Reserve will begin raising interest rates sometime in 2015. Aggressive areas of the fixed income market, such as high yield bonds, sold off during July after leading the bond market higher in the first half of the year. There continues to be pressure for interest rates to move higher, but adequate demand is keeping rates steady.  With government bonds from countries such as Italy and Spain now paying a similar rate to the U.S., demand for Treasuries may not dissipate any time soon.

Stocks fall for first time in five months

The S&P 500 Index and the Dow Jones Industrial Average fell in July, fueled by a major decline on the last day of the month.  Both indices ended the month in negative territory for the first time since January. Mixed second quarter earnings reports has helped fuel the recent spike in volatility and has some investors mulling a “stock correction”, as strong U.S. economic data could signal a faster pace for tightening of monetary policies.  However, every short-term pull back thus far in 2014 has resulted in a rally that pushed the markets higher. It is difficult to predict when and if this trend will end, so it’s important that investors maintain their focus on their long-term investment objectives.  While return expectations for 2014 are more muted compared to the last two years, a forward P/E ratio of 15.6x for the S&P 500 Index is in line with recent historic averages and may simply suggest more normalized rates of return for stocks going forward. 

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