U.S. stocks headed into the Labor Day weekend on an up note, with all of the major equity indexes strongly positive for August.
NASDAQ led the way with a 5.6% gain, its best month since January, and is now up 17.5% in price terms so far this year. The S&P 500 rose 3.0% for the month, lifting its YTD gain to 8.5%, excluding dividends. Both indexes closed at all-time highs on Wednesday before backtracking slightly. The Dow picked up 2.2% in August and is up 5.0% so far this year. Small cap stocks continued to benefit from worries about foreign trade, as the S&P SmallCap 600 gained 4.7% for August, adding to its 17.3% YTD rise.
Foreign stocks were mostly negative for the week and the month and remain mostly in the red for the year, at least in local currency terms. Chinese stocks continued to get battered, as the Shanghai composite ended the month with a 5.3% loss, 17.7% year to date. Japanese stocks held onto a slim 0.4% YTD gain after rising 1.4% in August. European stocks finished in the red for August, as the Stoxx Europe 600 fell 2.4%; the index is down 1.8% so far this year.
Long-term U.S. Treasury bond yields were mostly lower for August despite rising in the final week of the month. The benchmark 10-year note closed Friday at 2.86%, up five basis points for the week but down 10 bps since the end of July. However, the yield is up 45 bps since ending 2017 at 2.41%. The two-year note closed at 2.65%, 76 bps higher than where it began the year and down two bps for the month. Most analysts expect the Federal Reserve to raise interest rates at its next meeting later this month, although another one more before yearend is still in doubt.
Economic reports were mostly positive, except – again – for housing. Second quarter U.S. GDP was revised upward from an already strong 4.1% to 4.2%, still the fastest pace in nearly four years; the Street had been expecting a minor downward revision to 4.0%. Business investment was the reason for the uptick. Corporate profits for the quarter jumped 6.7% compared to the year earlier period, 16.1% on an after-tax basis, the biggest YOY gain in six years. Tax cuts plus economic growth were the main reasons for the increase. That exuberance carried over into the consumer economy, where the Conference Board’s consumer confidence index soared 5.5 points to 133.4 in August, its highest reading in nearly 18 years and well above the consensus forecast, which called for a slight decline to 126.8. “These historically high confidence levels should continue to support healthy consumer spending in the near-term,” said Lynn Franco, the firm’s director of economic indicators. Indeed, consumer spending rose 0.4% in July while personal incomes increased 0.3%. The core personal consumption price index, the Fed’s preferred consumer inflation indicator, rose 0.2% compared to the prior month and an even 2.0% versus a year earlier, a sign that inflation is still running within the Fed’s comfort zone. Housing, however, remained the one detractor from the good news, as pending homes sales fell 0.7% in July compared to the previous month and 2.3% versus a year ago, the seventh straight monthly decline by that measure. Again, low inventories of homes for sale are pushing up prices faster than incomes are rising, keeping many potential buyers out of the market..
Reports/dates/facts/links worth paying attention to over the next week:
1. September 3: U.S. markets closed for Labor Day.
2. September 4: Institute for Supply Management manufacturing composite index for August; construction spending for July.
3. September 5: Auto sales for August.
4. September 6: Weekly unemployment claims; ADP national employment report for August; ISM non-manufacturing index for August; factory orders for July
5. September 7: Employment situation for August.
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