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Monthly Market Monitor - August 2011

Market Indices1AugustYear-to-Date
S&P 500-5.43%-1.77%
MSCI EAFE-9.02%-5.66%
MSCI Emerging Markets-8.90%-8.31%
Barclays U.S. Aggregate Bond+1.46%+5.88%
Barclays Municipal+1.71%+7.29%
Barclays US Corporate High Yield-4.00%+1.94%

Global equity market performance faltered in August turning predominately negative on the year. Investors reacted to increased uncertainty over intense Washington haranguing on the US debt ceiling, Standard & Poor's unprecedented US credit rating downgrade from AAA to AA+, near multi-year lows in services and manufacturing activity levels, and continued high US unemployment. Markets were also held hostage by Europe's sovereign debt crisis that threatens to potentially include Italy. Widespread Wall Street reductions in 2011 and 2012 US and foreign GDP growth estimates have prompted fears of re-entering a global recession, yet numerous firms believe, as we do, that economic contraction (i.e. a double-dip recession) can be avoided. In highly unusual trading activity in August, US equity markets experienced intense volatility with numerous 4% swings on all three major US equity indexes, the Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite. Wall Street investors seemingly pin-balled between "risk-on" and "risk-off" trades, moving between attractively low-priced stocks and traditional safer havens found in US Treasuries and precious metals such as gold and silver. Gold prices rose 12.3% (+$200) to $1825/oz. in August, having reached an all-time high of $1912 on August 22. Global Financials took the brunt of sector pain as regulators conducted capital stress-tests on banks' ability to withstand diminished valuations on debt exposures to problematic European sovereign debt. Settlement fines affecting several US banks' home foreclosure and loan documentation practices also exacerbated fears.

Still relatively tame US inflation was brought into question as monthly food and fuel price gains led the Consumer Price Index (CPI) to a four-month high; but on an annualized basis, the CPI held steady at +3.6% on an annualized basis. Comparatively and of more concern, China's 12-month CPI rose to 6.5%. China is considered the world's current engine of growth. If inflation is too high, Chinese officials may undertake aggressive tightening measures to slow their economy, which subsequently may dampen worldwide growth. Without offering any hints for additional quantitative-easing stimulus and backed by still tame inflation, the Federal Reserve pledged to keep its Fed Funds bank borrowing interest rate "exceptionally low" at the current 0%-0.25% range to at least mid-2013. The move turned Treasury sellers into buyers which drove the benchmark 10-year Treasury yield down from 3% late July to just below 2% on August 18.

Treasury yields stabilized at the end of the month, rebounding off record lows after Fed Chairman Bernanke's Jackson Hole, Wyoming speech managed to placate equity markets without signaling a third round of Fed stimulus. According to Bernanke, the economic outlook now hinges on Washington's ability to implement needed fiscal policies that reduce long-term deficits without hurting near-term growth. Wall Street remains anxious for the August non-farm payrolls report on September 2 (+68,000 expected; 9.1% unemployment) as well as President Obama's planned Jobs Initiatives speech on September 8. The Fed will reassess its policy at its next FOMC meeting September 20-21. Its last meeting minutes revealed on August 30 that the Fed may be open to implementing additional stimulus, at least by a growing minority of Fed voting members.

Fixed-income investors who sought out safer havens in Treasuries and Municipals saw higher returns in August over both investment grade and high-yield Corporates. A Bank of America Merrill Lynch index representing all Treasury maturities returned 3.1% in August, its highest monthly return in over three-and-a-half years. The Barclays Municipals Index returned 1.7%. In contrast, corporate bonds rated BBB and above gained 0.13% in August, while junk-status corporate bonds lost 4%.

  1. Morningstar Direct

This information is compiled by Cetera Financial Group. No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

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