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Market Intelligence Desk: August Review .

U.S. stocks saw volatility return as investor sentiment shifted towards safe haven assets.

Market Intelligence Desk: August Review

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Summary:

  • The S&P 500 rallied on the last day of August to avoid its first negative month since March.
  • The Nasdaq Composite outperformed the Dow and S&P 500 for the second consecutive month.
  • Small caps underperformed with the Russell 2000 losing 1.4%; growth underperformed value.
  • Technology and Utilities were the leading sector performers.
  • Crude Oil touched monthly lows on 8/30, trading below $46 after ending July above $50/bbl.
  • Volatility spiked mid-month but returned to low levels by month-end.
  • Low inflation readings globally have investors questioning a third Fed rate hike this year.

U.S. stocks saw volatility return as investor sentiment shifted towards safe haven assets. August was blanketed with a handful of sharp daily declines driven by domestic political concerns, North Korea’s firing of a missile over continental Japan and the indirect impact of Hurricane Harvey. This led to the long treasury yield making fresh YTD lows, spot gold climbing to its pre-election levels and fresh yearly highs, and U.S. Dollar Index (DXY) declining to its lowest level since January 2015. Equities stabilized by the end of the month. The high/low ranges in the Dow Jones and S&P 500 indexes each amounted to less than 3%.

Hurricane Harvey will go down as the greatest natural disaster in U.S. history with damages currently estimated at $160B. Harvey’s impact has already been seen in the oil and gas markets and certain individual stocks. Its broader impact remains to be seen, and some point out that reconstruction spending can be economically stimulative longer term. Harvey is the third major hurricane to hit the U.S. in the last 12 years. In October 2012 Sandy created $71B in damages and in August 2005 Katrina cost $108b. After Katrina the S&P 500 declined less than 3% over less than two months’ time before rising 35% over the following two years. Similarly the S&P 500 declined less than 3% within weeks after Sandy before rising more than 50% over the next two years.

Investors entered 2017 expecting U.S. stocks to outperform globally, the dollar to strengthen as the Fed hiked rates, economic expansion, a pickup in inflation, and increased volatility given geopolitical concerns. In many cases the opposite came true. The long Treasury yield made fresh YTD lows in late August, the dollar index (DXY) is experiencing its worst decline in 15 years, emerging markets are greatly outperforming the United States, and the VIX Index is one-month removed from making an all-time low.

Volatility returned in August as domestic and geopolitical issues pushed the S&P 500 to the most intraday 1% moves (+/-) during one month (3x) thus far in 2017. Over a three-day period ending 8/10, the CBOE VIX index rose from below 10 to close above 16, after Trump was forced to disband two business advisory councils which caused investors to wonder if the administration can deliver on market-friendly initiatives like tax reform and infrastructure spending. The most recent missile test over Japan on August 28 had an immediate impact on the dollar and gold but did not meaningfully move the VIX.

Trading volumes declined this month. August is generally a quiet month for volumes with notable exceptions in August 2011 (U.S. Debt Crisis) and August 2015 (Chinese currency devaluation). The final two weeks of August were particularly slow, with no session seeing more than 5.4 billion in consolidated volume. Friday 8/25 was the slowest full trading day of the year with 4.9 billion shares traded. YTD volume is averaging 6.6 billion shares per day vs. 7.5 billion for the same time last year.

Sector Performance:

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The Information Technology and Utility sectors were the top performers in August, while Energy stocks fell by the largest margin. In 2017, the S&P 500 Energy Index has not been able to get out of its own way, falling by almost 17%, and posting monthly losses 7 out the 8 months.

Information Technology:

The Technology sector continued its leadership in August, outperforming all sectors, gaining 3.2% for the month. The sector is up 25% for the year, far outpacing the second best group, Healthcare, which is up approximately 18% YTD. The focus this year has been on the “FAANG” stocks, some of which were lower this month. However, the group was led by heavily weighted AAPL, which rose over 10%, closing at a record high on 8/31.

Utilities: rising geopolitical risk, falling inflation data which decreases the likelihood of another rate hike in 2017, and long yields making fresh YTD lows combined to make the S&P Utility Index a top gainer (+2.7%) in August. The group is sensitive to rate hikes because their businesses rely on issuing debt to fund new and improving infrastructures. Heading into August the probability of a December rate hike was 42%. Wider than normal price swings for stocks and an unexpected dovish tone from Chair Yellen reduced the likelihood to about 30% at month end. Separately when “risk-off” sentiment takes hold, investors seek higher dividend paying stocks and the Utility sector has a wide range of high-yielding options.

Energy: Crude oil had its best month of the year in July with a +9% advance, but a decline of 6% made August the worst of the year. Energy-related equities have been in a downtrend since January 1st and as of the end of August the S&P Energy index is off 16.8% YTD versus a decline of 12.3% in crude itself. Oil rose over $1 on 8/31 as the extent of the Harvey-related disruption became apparent. Despite this, price action this year suggests investors do not see a near-term rebound and believe capital appreciation and dividend streams are better elsewhere. However all is not grim in the energy space as alternative & renewables are looking good: the Wilderhill Clean Energy Index is up 18% for the year, the Ardour Solar Energy Index +25% and the Nasdaq Clean Edge Green Energy Index is up 18%.

Financials : The S&P 500 Financial index fell about 1.9% in August after two monthly advances, and all subsectors were also in the red. However taking a wider view, performance is uneven. Year-to-date the S&P Insurance Index is up 7.1%, the KBW Bank Index up 1.3% , the Wells Fargo BDC Index off 5.8% and Nasdaq Bank Index is down 6.8%. Sentiment on the group has turned since the post-election period with a flat yield curve hurting the group.

Small Caps: Volatility sent small-caps into a tailspin during the first half of August as the Russell 2000 fell more than 5.5% putting it on pace for its worst month since January 2016. A weakening dollar also makes small caps less attractive than their large cap peers with international exposure. However, the index stabilized around its long-term support of 1,350, both on 8/18 and 8/21, and then trended higher to finish in the green 7 out of the last 8 trading days, ending down only 1.4%.

Earnings:

Earnings season ended mid-month and was perceived as solid by investors. According to FactSet, of the 91% of S&P 500 companies that reported for Q2, 73% beat consensus EPS expectations, better than the 70% one-year average. Revenues were the real story with 69% beating consensus, well above the 56% one-year average. In the aggregate, companies are reporting earnings that are 6.1% above expectations, above the 4.7% one-year average. Sales were 0.7% above expectations beating the 0.5% one-year average.

Economy & rates:

Q2’17 U.S. GDP was the strongest in two years, as the second print was revised up 0.4% to a strong 3% annualized rate vs the 2.6% increase predicted posted last month. The Commerce Department said that strong consumer spending, coupled with an uptick in improved business investment helped raise the bar. Consumer spending accounts for two-thirds of U.S. economic activity and is a key cornerstone of economic activity in this country. Meanwhile two housing-related prints late in the month indicated caution is warranted.

Existing home sales disappointed at 5.44 million vs. the survey estimate of 5.55 million - an 11-month low - and second consecutive monthly decline. Rising home prices amid leaner inventories were cited as factors in the decline. New home sales were the lowest all year and below consensus at 571,000 vs. 610,000 expected. Still, new home sales have been trending higher for about two years.

The 8/25 annual meeting of “Fed Heads” in Jackson Hole, WY was largely a non-event, as expected, as it relates to future monetary policy considerations in the United States. This was best seen by the December Fed funds futures contracts which were little changed in the proceeding days. In what could have been Yellen’s final appearance at Jackson Hole, the Chair’s speech focused largely on the importance for financial regulation. Her lack of monetary policy commentary was generally perceived as dovish.

Meanwhile ECB President Mario Draghi’s speech was more noteworthy for what he didn’t say, meaning he did not express concern about the euro’s robust strength in 2017. Yellen and Draghi each spoke on Friday, August 25th and that same day the EUR/USD reacted by breaking out from a 4-week consolidation range to fresh 52-week highs. The euro is already seeing its strongest year since 2003. Although a pullback appears overdue, future inflation readings in the U.S. and the Eurozone will be a key determinant going forward.

Looking ahead:

In September 2016 the S&P 500 experienced 5 trading days with an absolute move of greater than 1%. Seasonally September is not a strong month for equities, with the SPX sporting average returns of just 0.2% and 0.07% over the last five and ten years, and negative (0.6%) over the last 20 years.

September carries a host of market moving events starting with next week’s ECB monetary policy meeting. The current EQE asset purchase plan consists of 60B euros a month in debt purchases which are scheduled to end in December. The ECB could announce a tapering to 30B euros a month with a duration extension to the middle of 2018, however some are forecasting the central bank could postpone this decision until the October meeting. Other considerations will be paid to whether or not Draghi aims to talk down this year’s robust strength in the euro, as well as the growing political risk with Presidential elections taking place in Germany and Norway.

The more important monetary policy meeting takes place later in the month on September 20th when the FOMC is expected to commence quantitative tightening (QT) by reducing its balance sheet. Quantitative easing (QE) began nine years ago and left the Federal Reserve with a record $4.5T balance sheet made up of $2.7T in Treasury bonds and $1.8T in mortgage-backed securities (MBS). The pace of sales is expected to begin at $10B per month, $6B Treasury and $4B MBS, and then gradually increase every three months. The plan is expected to take between three and five years to get the portfolio down to a target of roughly $2T, however the committee will likely be flexible depending on QT’s impact on markets and the overall health of the economy. The devil will be in the details.

An important concern that will only grow throughout September is the debate over the debt ceiling which needs to be lifted by the end of the month otherwise the government will run out of money to pay its bills. Failure to raise the debt limit will likely result in a credit rating downgrade by Moody’s Investors and Fitch Ratings, however most expect this “crisis” will be averted. The debt ceiling debate surfaced two times during Obama’s term and on both occasions the limits were lifted just before the deadline. One could characterize it as a low risk issue worth taking seriously. One possibility is a bill combining Harvey relief, a debt ceiling raise, and three months of government funding which politically could make it tough to vote against. This would push a government shutdown risk to December while extending the debt ceiling until after the mid-term elections. The wildcard of course is Trump who needs to back off his insistence on including money to build a wall near Mexico.

Low global inflation readings, a flattening yield curve and narrowing market breadth are potential warning signs. Bloomberg notes that only about 43% of stocks in the S&P 500 are currently trading above their 50-day moving averages, down from 74% last month. The geopolitical scene, particularly North Korea, and U.S. domestic politics also have the potential to derail equities.


The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. All information contained herein is obtained by Nasdaq from sources believed by Nasdaq to be accurate and reliable. However, all information is provided “as is” without warranty of any kind. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.

Nasdaq's Market Intelligence Desk (MID) Team includes:

Michael Sokoll, CFA is a Senior Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information. 

Jeffrey LaRocque is a Director on the Market Intelligence Desk (MID) at Nasdaq, covering U.S. equities with over 10 years of experience having learned market structure while working on institutional trading desks and as a stock surveillance analyst. Jeff's diverse professional knowledge includes IPOs, Technical Analysis and Options Trading. 

Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors. 

Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.

Annie O'Callaghan is Director on the Market Intelligence Desk (MID) at Nasdaq. Annie has worked for NASDAQ in a variety of roles including support of Nasdaq C-level management in client retention and customer service. Annie also served as a Sales Director in Nasdaq’s Transactions Services business. Prior to joining Nasdaq, Annie worked at AX Trading, managing accounts for its Alternative Trading System and served on Credit Suisse's trading desk as an Electronic & Algorithmic Sales Trading Analyst.

Brian Joyce, CMT has 16 years of trading desk experience. Prior to joining Nasdaq Brian executed equity orders and provided trading ideas to institutional clients. He also contributed technical analysis to a fundamental research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Airline companies among others understand the trading in their stock. Brian is a Chartered Market Technician.

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