For many it was a hot August. Time to slowdown, go on holiday and not worry about financial markets. Of course, there is a lot to worry about but August performance across most asset classes showed general range-bound behavior but with a continued reach for yield within the equity and fixed income asset classes. The tight range has a lot to do with no news to change expectations. After weeks of hype, the comments of Fed Chairman Yellen did not serve up anything new. The data driven Fed may raise rates or not based on further confirmation of data that seems stuck in a range.
The big winners for the month were the Russell 2000 small cap and value indices as measure day the ETF's (IWM and IWN) and the high yield and merging market bond indices (HYG and EMB). The S&P 500 index (SPY) gained only 12 bps and the long bond (TLT) sold-off by one percent in a choppy month. August was a difficult month for any active trader given no strong trends.
The economic news provided evidence of growth that followed the shallow trends that have been a hallmark for 2016. Growth is nothing like the pre-Crisis trend, but rather a muddle that could easily stall or move higher. Inflation is closing closing in on the Fed 2% target, but ever so slowly. The PCE core is at 1.6% and the CPI ex food and energy is at 2.2%. There is no evidence of an overshoot and with the rest of world seeing low inflation, these numbers can easily move lower.
As an economist knows, the marginal utility of the next dollar consumed is less valuable then the last. So is it with monetary policy, central bankers push on a their money string only to see limited impact. While there may be a growing consensus for fiscal stimulus, there is little evidence that policies are changing radically.
For investor, fall starts the day after Labor Day. An election, more talk of Fed action, and markets focusing on growth may change this range-bound behavior and end of the dog days of summer. However, without a market shock there is little that may change expectations.