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September 8, 2017

Bernardo Wealth Planning August Market Commentary

Key Points:

  • The US economy continues to look strong with GDP rising to 3% in Q2;
  • Hurricane Harvey left its wrath on Texas, impacting thousands of lives in Houston and having reverberations in energy and stock markets;
  • The political environment is getting increasingly more complex, as issues with North Korea, tax reform and the debt ceiling weigh on investors’ minds.

 

US GDP in the second quarter was revised up to 3%, marking the best quarterly growth since 2015. Strong consumer spending and business investment were the main contributing factors.  Unemployment stands at 4.4%, but wage inflation remains muted which has kept interest rates contained. The US dollar index has steadily declined against major currencies throughout 2017, increasing the attractiveness of US exports.

Stocks had a tepid month with the S&P500 up 0.31% in August. Large cap stocks continued their dominance over mid and small cap stocks, which lost 0.78% and 1.27%, respectively. Growth outpaced value for another month, with the Russell 1000 Growth index up 1.83% while the Russell 1000 Value down 1.16%. Technology was the best performing sector up 3.47%, followed by utilities (+3.25%) and healthcare (+1.85%). Hurricane Harvey caused a selloff in the energy sector (-5.18%).  Additional losses were felt in telecom (-3.02%), consumer discretionary (-1.84%), financials (-1.61%) and consumer staples (-1.06%). The S&P500 is up 11.93% for the year but risks are mounting with the North Korea situation and the lingering debt ceiling negotiations in Congress.

International markets were flat in developed economies, with the MSCI EAFE down 0.04%.  Emerging markets had a strong August, up 2.23%. Year to date the emerging market index is up 28.29% with strong returns in Russia (+8.13%), Brazil (+6.31%) and China (+4.22%) for the month. Tensions in North Korea and the continued Brexit talks remain key risks in Europe and Asia, but overall global growth seems to be improving.

Interest rates had a dramatic decrease during August as investors sought a flight to quality following the ongoing crisis in North Korea. The 10-year Treasury rate decreased from 2.25% to 2.12%. The Barclays Aggregate bond index increased 0.9%, with most sectors of the bond market experiencing gains. High yield bonds sold off -0.04%, highlighting the risk-off stance of the bond market. The Fed may need to curb future rate increases given low inflation readings and the economic impact of this hurricane season.

Sources: Morningstar, JP Morgan, Wall Street Journal

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