Stocks ticked higher in early trading this week following a significant pullback during the first half of this month. Heading into August, the S&P 500 was higher by approximately 20% but has since pared some of those gains and currently sits about 15.5% higher on the year. International stocks have not been immune to the recent consolidation, falling by nearly 7% from the highs at the end of July. Still, global stocks remain firmly in positive territory for the year with the MSCI ACWI (Global Stock Index) higher by nearly 12%.
The recent pullback has been driven largely by two key factors – higher interest rates and a stronger dollar. Long-term Treasury yields are up substantially since last fall. For reference, last August the yield on the 10-year Treasury was hovering around 3% but now is trading around 4.3%. As a result, bonds have given back most of their gains from earlier this spring, and the Bloomberg US Aggregate (taxable bond index) is essentially flat on the year. Municipals have held up better, still in positive territory by about 1.6% for the year due to ongoing technical strength. Meanwhile, the U.S. dollar has rallied nearly 4% over the last month, putting further pressure on international stocks for U.S. based investors. For investors, this rapid rise in interest rates has weighed on bond prices but also has provided a significant opportunity to earn higher yields. The average yield on the Bloomberg Aggregate Bond index now is more than 5% for the first time in more than 15 years, while municipal bonds are boasting a yield close to 4%.
Despite the recent decline in both stocks and bonds, there is a silver lining – the economy. A significant portion of the recent tick higher in interest rates can be explained by resiliency in the economy. Heading into this year there were several reasons to think an economic recession may be on the horizon. However, the real economy continues to show strength, and is even accelerating. The Fed’s GDPnow model currently is projecting real GDP to increase by more than 5% in the third quarter. Excluding the COVID re-opening, it’s been more than six years since we’ve had a quarter of 4%-plus GDP Growth.
Source: GSAM, CNBC, JPMorgan
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