In August, stocks started out trading within the range they had traded in for most of the year. Mid-month, investors were shaken when stocks stumbled and posted their worst monthly decline since August 2011. Large US stocks in the S&P 500 were down -6.0% in August resulting in a loss of -2.9% on a year-to-date basis. Small cap stocks in the Russell 2000 are also down -3.0% for the year. International stocks were down even more posting a -7.6% loss for the month and -4.2% for the year. Emerging markets fared even worse with year-to-date losses of -12.2%. The Barclays Aggregate Bond Index had positive returns of 0.5% through August even though the one month return was slightly negative.
Most of the blame for the decline seems to stem from worry over slowing growth in China. In response to the slowdown, China devalued their currency by 4.4% in an effort to spur exports. Although China is a large economy, most analysts believe it would be unlikely that they could pull the US into recession. However, it could slow the growth of other foreign countries more dependent on the Chinese economy.
The US economy is growing and GDP growth was revised sharply higher for the second quarter from 2.3% to 3.7%. Analysts had expected growth to be revised to 3.2%.
Oil prices plummeted below $38 per barrel during the month which is their lowest level since 2009. At the end of the month, though, prices rose sharply as Venezuela asked for an emergency OPEC meeting in hopes that an agreement could be reached to slow production and reduce the oversupply thereby stabilizing oil prices. Most analysts believe that oil prices below $50 cannot be sustained long term, but also believe we may continue to see volatility.
Second quarter earnings season is coming to an end and is showing negative growth in earnings for the S&P 500 compared to second quarter last year. However, if the numbers are adjusted to exclude the energy sector which has been the largest drag due to lower oil prices, second quarter earnings would have shown positive growth of 5% and revenue growth of 1.1%. This growth is still less that the almost 9% earnings growth that has been the average over the past four quarters but should not be overly alarming.
Eyes remain on the Fed to see if they will follow through and raise short-term interest rates in September. Even before the China events, analysts were beginning to doubt that the rise would happen before the December meeting. With the devaluation of the Chinese currency and market turmoil, many now believe the need to raise rates in September has subsided. Some analysts are even wiping out the probability of a change in 2015.
While the US stock market did correct 12% from its highs, many analysts do not believe a sustained bear market (a decline of 20%) will evolve. Continued volatility is likely, but factors that normally lead to a bear market (recession, high valuations, commodity spikes, aggressive Fed tightening) are not in play. The volatility may provide opportunities to add equity positions at attractive valuations.
