By Greg Naylor
August was an uneventful month, as many market participants traditionally take vacation at the end of summer before school starts. Although volume was light, as it usually is this time of year, many markets continued to move higher as Bernanke keeps the door open to further stimulus. By the numbers:
Stocks & Bonds
After a positive July for the U.S. stock market, August saw continued gradual growth. International stocks (MSCI EAFE) moved slightly up, with continued hope for progress in Europe and also the announcement of additional stimulus spending in China. Bond prices stayed relatively flat, and overall inflation remains tame.
| S&P 500 Total Return | MSCI EAFE | BarclaysAggregateBond | Unadjusted CPI | |
| August | 2.25% | 2.36% | 0.07% | -.16% |
| July | 1.39% | 1.07% | 1.38% | -.15% |
| YTD | 13.50% | 3.52% | 3.85% | 1.26% |
| 2011 for reference | -2.11 | -14.22 | 7.84% | 3.38% |
Commodities & Currencies
With renewed talk of central bank action around the world, oil futures rebounded in August. NYMEX crude gained 9.55% for the month to close at $96.47 per barrel, and the average price of gas in the U.S. also increased nearly 10%. President Obama has talked about a coordinated international effort to bring down the price of oil by simultaneously releasing oil from national reserves. Some countries like the idea, others do not, and so far the talks have not led to any action.
Also in August, gold and silver prices drifted higher, while food prices stayed relatively flat after posting remarkable gains earlier in this summer of drought. The U.S. dollar index declined by 1.81% in August, and for the year is up 1.17%, as its status as a safe haven continues to offset its structural weakness from continued government borrowing.
Economy
The Commerce Department announced its revised estimate of 2nd quarter GDP growth. At 1.7%, the number was better than the 1.5% in its first estimate, but still below the 2% growth considered necessary to improve the employment picture. The market has started to greet bad news as good news, since the continued slow growth keeps the door open to further stimulus from the Fed.
The Department of Labor reported that the unemployment rate declined from 8.3% to 8.1%. This time, the market was able to find bad news behind the good news. Most of the decline is not from job creation, but from discouraged workers giving up their search entirely and accepting a sort of forced retirement.
The housing market is showing signs of improvement. According to the National Association of Realtors (NAR), the annual rate of existing-home sales in July increased more than 10% from July of 2011. In addition, average home prices have increased to $187,300, a 9.4% increase in that same 12-month period. Sales have been spurred by record-low interest rates.
Summary
As summer draws to an end, and as we enter a contentious election season, it is likely that stock market activity and volatility will increase. Although both presidential candidates have announced plans to reduce the federal deficit, so far these are 10-year plans with only gradual reductions in federal spending in the shorter term.
What is new about this election is the changed conversation around Medicare and Social Security. In the past, Democrats have staunchly defended these programs, and Republicans have pressed for reform. Today, the two parties no longer disagree about entitlement reform, they only disagree on the details. In my opinion, further cuts to Medicare and Social Security are a foregone conclusion.
More than ever, retirees must have a plan to deal with these changes.
This material was prepared by Greg Naylor, and does not necessarily represent the views of Woodbury Financial or its affiliates. This information should not be construed as investment, tax or legal advice and may not be relied upon for the purpose of avoiding any Federal tax liability. This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. The S&P500, MSCI EAFE and Barclays Aggregate Bond Index are indexes. It is not possible to invest directly in an index.
Investing involves risks and investors may incur a profit or a loss. Past performance is not an indication of future results.
Data Sources:
www.standardandpoors.com – S&P 500 information
www.msci.com – MSCI EAFE information
www.cmegroup.com – NYMEX crude prices
www.fxstreet.com – U.S. Dollar performance
www.realtor.org – Housing market data
www.bea.gov – GDP numbers
www.bls.gov – CPI and unemployment numbers
About Greg Naylor: Greg is a partner and co-founder of Fiat Wealth Management, an independent financial advisory firm in Long Lake, Minnesota. He has been investing for over 7 years and enjoys sports, reading, singing, and spending time with family. Greg is a 2004 graduate of the University of Minnesota and lives in South Minneapolis with his wife Kat. Click here for more articles by Greg.
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