Equity markets and global economics look vastly different from last August, when China's currency devaluation and poor liquidity conditions resulted in increased volatility and sharp drops in the markets. A year later, global markets were eerily quiet during the month of August. While most market returns finished in the black, returns were muted with little movement - either up or down. August 31 marked the 38th straight day without so much as a 1% daily change in the S&P 500, the fourth narrowest August trading range since at least 1928.
The U.S. economy looked more mixed during the month of August than in previous months. The labor market remains healthy with 155,000 new jobs added during the month. This new jobs number was much lower than the previous month but overall still positive. The unemployment rate is holding at a historically low 4.9% and supporting the continuing U.S. economic recovery. At Jackson Hole, Wyoming, Fed chairwoman Janet Yellen voiced a positive outlook on the economy and built a case for possibly raising benchmark interest rates before the end of the year.
Despite the strong labor market and the Fed's positive outlook, productivity indicators slipped during the month. U.S. second quarter GDP grew slower than initially thought, being revised down to 1.1% from the initial estimate of 1.2%. Economic activity measured by the Purchasing Managers Index (PMI) also slipped during the month. The manufacturing sector actually contracted during August registering a 49.4 on the index, a decrease of 3.2 points from the July reading of 52.6. The service sector activity also slipped during the month but remains in expansionary territory.
Globally, the economic outlook appears weaker. PMI's in many developed and emerging markets ticked down during the month. A majority of global data still remains in expansionary territory but if PMI's continue in a downward trend, we should expect to see a significant contraction in global growth.
In the U.K. and Eurozone, the Brexit details are just beginning as the U.K holds formal meetings as to how it might leave the E.U. PMI's slipped across Europe but the negative impacts of the split will take more time to reveal themselves. At least a mild recession is a possibility in Britain and Europe.
In a race to try to surpass the U.S. as the world's largest economy, China has hit a rough spot and growth is beginning to again deaccelerate. A slowdown in the second largest economy in the world is expected to be felt widely. Mounting global risks and a mixed domestic outlook, combined with expectations for a Fed rate increase by year end, keep us defensively biased in our portfolios.
