August 2008 Market Commentary

LATEST PERFORMANCE

(As of August 31, 2008)

 

Aug-08 Y-T-D 1 Year 3 Year 5 Year
EQUITY
S&P 500 1.45% -11.39% -11.14% 3.66% 6.92%
S&P 400 1.71% -4.07% -4.22% 5.97% 10.80%
S&P 600 4.18% -1.21% -6.20% 4.72% 10.78%
MSCI EAFE -4.05% -17.31% -14.41% 8.08% 13.86%
MSCI Emerging Markets -7.99% -21.87% -10.09% 19.03% 23.50%
FIXED INCOME
Lehman Aggregate 0.95% 2.01% 5.87% 4.26% 4.61%
Lehman Muni Bond 1-10 Yr 1.17% 3.43% 6.31% 4.01% 3.95%
Lehman High Yield 0.35% -2.27% -1.01% 3.54% 6.71%
Lehman Global Aggregate -1.65% 1.96% 7.65% 4.98% 6.26%
CSFB Bank Loan -0.06% -2.77% -1.36% 2.62% 4.15%
OTHER
DJ-AIG Commodity -7.28% 3.98% 17.61% 7.77% 12.90%
DJ-Wilshire US REIT 2.27% 1.68% -8.65% 5.44% 14.32%
S&P-Citi World Property -2.09% -15.83% -20.05% 5.28% 14.94%
Red Rocks Domestic LPE 1.97% -16.80% -22.45% -2.43% 7.82%
Red Rocks Global LPE -3.53% -17.27% -20.22% 9.08% 20.50%
3-Month T-Bills 0.15% 1.53% 2.99% 4.20% 3.22%

 

The Markets

U.S. equity markets rebounded from a poor July to post solid gains in August. Small caps outpaced mid and large cap issues, and styles were mixed. Growth outperformed value in large cap, but the reverse was true in midcap and small cap. Consumer confidence rose to five points to 56.9, which was reflected in the consumer discretionary sector’s gain of more than 7% during the month. Technology and healthcare also posted gains in August, while financials continued to fall with the ongoing credit crises. Energy, which had far and away been the biggest winner year-to-date, actually fell in August as oil prices began to retreat. Prices on a per barrel basis fell from $125 down to $115.50, a decline of 7.8%. As expected, the price of a gallon of gas also decreased, down roughly 27 cents. It is interesting to note that market volatility has substantially increased in 2008. There have already been 28 days of 200 point moves on the Dow Jones Industrial Index, compared to 18 such moves in all of 2007 and only four in 2006.

On the international equity front, markets continued their slide, especially emerging markets, which were down for the third consecutive month. Year-to-date the S&P 500 has outperformed the MSCI EAFE by nearly 6% (-11.39% vs. -17.31%).

U.S. investment grade bonds rebounded in August after four consecutive months in the red. Yields on two-year and 10-year Treasurys fell 15 basis points each during the month. Declining energy prices and the prospect of slower global economic growth contributed to the decline in yields. High yield bonds posted a modest gain as a weak economy pushed more issues into bankruptcy, thus raising yields. International fixed income performance was positive both across the yield curve and sectors. Longer maturity issues outperformed shorter maturities across the yield curve, while government issues generally outperformed the credit and securitized spread sectors. The leveraged loan market (bank loans) struggled again in August, as defaults ticked up slightly and yields fell.

Commodities fell precipitously for a second straight month, with most of the decline due to the fall in oil and natural gas prices (down 13%). Other commodities, including metals, fell as the fear of a global economic slowdown reduced demand considerably. Gold was down 8.7% for the month. Gains in real estate were mainly domestic, as international markets fell with the growing perception of a global economic slowdown.

Some key news and statistics during the month of August were:

  • The Federal Reserve, the European Central Bank and the Bank of Europe all held interest rates steady during the month.

  • The U.S. trade deficit narrowed considerably on the declining price of oil. Since oil accounts for more than 50% of the trade deficit, a further decline in oil prices should reduce that figure even more.

  • The U.S. dollar rose to a five-month high against the euro and a seven-month high against the yen.

  • AIG, one of the world’s largest insurers, posted its worst loss in 28 years after writing down more debt.

  • Merrill Lynch sold more than $30 billion of mortgage related assets to further clean up their balance sheet.

  • GM posted a $15.5 billion loss.

So the news was mixed and so were the markets: U.S. equities up, international equities down; real estate up; and commodities down. One thing that has been constant throughout the year is that volatility in all markets has picked up considerably. Having a diversified portfolio spread among a number of asset classes should hopefully dampen overall portfolio volatility, making it easier to rest at night. Until next month…

Steve Karsh, MBA

Director of Research