Markets in perspective: August in review

September 9, 2014 Categories: Portfolio Corner
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After the U.S. equity market sell-off in late July, the first week in August was slow-going. But, the market recovered to finish with a 4.2% return (represented by the Russell 3000® Index) for the month, making August the second-strongest month of the year for U.S. equities after February. The S&P 500® Index also hit a new milestone when it surpassed 2000 points on August 25. As a whole, the month served as a good reminder of how difficult it is to anticipate a sell-off and short-term market rebound.

Non-U.S. stocks (represented by the Russell Developed ex-U.S. Large Cap Index) returned 0.2% for the month and lagged U.S. stocks by 4.0% and emerging market stocks (represented by the Russell Emerging Markets Index) by 2.1% for the month. This is consistent with the year-to-date returns as well where U.S. stocks (represented by the Russell 3000® Index)  have led non-U.S. stocks by 5.5% and Emerging market stocks have led non-U.S. stocks by 7.1%.

Global REITs are the strongest performers year-to–date as of August, with the FTSE EPRA/NAREIT Developed Real Estate Index up 13.7%.

Capital Market Returns chartjpg

As of August 31, 2014. Sources: U.S. Equity: Russell 3000® Index; Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index; Emerging Markets: Russell Emerging Markets Index; U.S. Bonds: Barclays U.S. Aggregate Bond Index; Global REITs: FTSE EPRA/NAREIT Developed Real Estate Index; Commodities: Bloomberg Commodity Index Total Return; Hypothetical balanced portfolio: 30% U.S. Equity, 20% Non-U.S. Equity, 5% EM, 35% Bonds, 5% REITs, 5% Commodities. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Best-performing asset class in August: U.S. equity

The U.S. equity market was the strongest performer in August. Small cap U.S. stocks (represented by the Russell 2000® Index, which returned 4.96% for the month) led large cap stocks (represented by the Russell 1000® Index, which returned 4.13% in August) by an 83 basis point margin. The Russell 1000® Dynamic Index (up 4.67%) outpaced the Russell 1000® Defensive Index (up 3.73%) during August and leads the Russell Defensive Index by 1.90% for the year-to-date.

Worst-performing asset class in August: Commodities

Commodities were the worst performing asset class in August, returning -1.05% as measured by the Bloomberg Commodity Total Return Index. The strong U.S. dollar and weaker demand from China adversely affected energy prices during the month. Agriculture prices softened due to increased supply, mostly due to improved farming conditions in the U.S.

Asset Class Dashboard – August 2014

One-year returns for all asset classes remained within their typical historical range (blue range bar) despite the strong run financial markets have been experiencing, the one exception being cash. In other words, even though equity markets have reached new highs in 2014, the magnitude of those returns appears in line with historical norms for 1-year returns.

This month’s reading of the Asset Class Dashboard shows that all equity markets are above their 12-month historical average as of August 31. As mentioned above, cash falls below of its historical typical range with a 0.0% return, but until interest rates change, this should be expected. Further, only Commodities have had a negative return over the last 12-month period, however, the -2.9% return is within the typical range investors could expect.

Asset Class Dashboard August 2014

The bottom line

August was a strong month for U.S. equity, right on the heels of July’s sell-off. The quick rebound in equities demonstrates the difficulty in timing the market – and the importance of staying invested.

Real asset exposure has generated a mixed bag of results in 2014, with Global REITs leading year-to-date but commodities lagging. As always, asset class returns are difficult to predict and having diverse exposures to non-correlated assets may contribute to a well-diversified investment portfolio that can weather many different market environments.

Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Indexes are unmanaged and cannot be invested in directly.

Strategic asset allocation and diversification do not assure profit or protect against loss in declining markets.

The Dow Jones – UBS Commodity Total Return IndexTM was renamed the Bloomberg Commodity Index, effective July 1, 2014.

Bloomberg Commodity Index Total Return: Composed of futures contracts on physical commodities. Unlike equities, which typically entitle the holder to a continuing stake in a corporation, commodity futures contracts normally specify a certain date for the delivery of the underlying physical commodity. In order to avoid the delivery process and maintain a long futures position, nearby contracts must be sold and contracts that have not yet reached the delivery period must be purchased. This process is known as “rolling” a futures position.

FTSE EPRA/NAREIT Developed Index is a global market capitalization weighted index composed of listed real estate securities in the North American, European and Asian real estate markets.

Barclays U.S. Aggregate Bond Index: with income reinvested, generally representative of intermediate-term government bonds, investment-grade corporate debt securities and mortgage-backed securities.

The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000® Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

The Russell 3000® Index: Measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.

The Russell Developed ex-US Large Cap Index offers investors access to the large-cap segment of the developed equity universe, excluding securities classified in the US, representing approximately 40% of the global equity market. This index includes the largest securities in the Russell Developed ex-US Index.

Russell Emerging Markets Index: Index measures the performance of the largest investable securities in emerging countries globally, based on market capitalization. The index covers 21% of the investable global market.

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