Mixed markets. August was another great month, at least here in the U.S. Once again, financial markets did very well. All three U.S. indices were up, with tech leading the way. The Nasdaq was up by almost 6 percent, the S&P was up by more than 3 percent, and the Dow was up by more than 2 percent. International markets, on the other hand, dropped again after last month’s bounce. Developed markets were down by just under 2 percent, while emerging markets dropped almost 3 percent. The gap between the U.S. and the rest of the world continues to widen, both economically and financially.
Rising risks. The problem? The U.S. continues to do well, while risks are rising elsewhere in the world. The U.S. economy, for example, grew faster in the second quarter. It was revised up from 4.1 percent to 4.2 percent, after an earlier upward revision to the first quarter. And the faster growth was broad based: consumer confidence rose to an almost 18-year high, and retail sales grew much faster than expected. The Fed remains on board as well, with Chair Jerome Powell once again highlighting the healthy condition of the economy at the annual Jackson Hole conference.
Sales. From a corporate point of view, the news continues to be equally good or even better. At quarter-end, with 99 percent of companies reporting, almost three out of four companies reported sales increases above expectations. This result is significantly above the average over the past five years. The amount of the beats is also above average. Not only is sales growth doing well in absolute terms, but it is also beating expectations—which is positive for market performance.
Earnings. Sales matter, of course. But it is the money a company keeps—the earnings—that matter more. Here, the news was also very good. Four out of five companies beat estimates and did so by more than expected: 25 percent as of the end of August, up from an estimate of 21.3 percent as of the end of July. As with the economic data, the news was good and kept getting better during the month.
These strong fundamentals have continued to support U.S. markets, even in the face of trade concerns, a rocky domestic political environment, and some high-profile earnings misses by major tech companies. Despite a midmonth pullback, U.S. markets closed the month at or close to all-time highs.
International news. As good as things are in the U.S., however, international markets are facing significantly more uncertainty. The ongoing trade and tariff conflict has put economies around the world at risk, particularly China and Europe. A strong U.S. dollar, driven by growth and rising interest rates, has put emerging markets back in the spotlight. Collapses in the Turkish lira and Argentine peso have raised concerns of another emerging markets financial crisis, which hit markets worldwide at midmonth. Trade uncertainty has also started to slow growth around the world, as companies cut hiring and investment to try to figure out the new landscape.
Not all the international news was bad, of course. A preliminary trade deal between Mexico and the U.S. was announced last month, which suggests that new deals are possible and even likely. Plus, negotiations with Canada are ongoing. North Korea also remains in play for a potential deal, while the trade war between Europe and the U.S. seems to have been put on hold. Overall, however, the international environment remains significantly more uncertain, and risky, than here in the U.S. But what does this mean for September?
Real risks. At the moment, the strong economic and corporate fundamentals seem to have those risks well contained here in the U.S. That may be an illusion, however. September is a notoriously volatile month. It would not be a surprise to see markets suddenly take a closer look at risks—and pull back. International risks might very well worsen, and an emerging markets contagion (while unlikely) remains a possibility. We have had lots of good news, and we may be overdue for a weaker month.
Positive outlook. As we move into September, although risks are real, the fundamentals should continue to help investors keep focused on the good news. As such, the outlook remains generally positive for September. While it likely will be a volatile month—and a pullback is quite possible—the strong fundamentals should help limit any volatility.