The Commerce Department announced that U.S. gross domestic product (GDP) rose more in the second quarter than first reported. The revised figure showed a 3.3% increase in economic output compared to an initial reading of 1.9%. The surprisingly strong performance was in large part a result of record-setting exports. Going forward, expectations remain subdued, as several uncertainties could affect economic growth.

Sluggish Overseas Markets: If overseas economies, particularly in Europe, continue to struggle, export activity from the U.S. could slow. Demand from overseas markets and a weak dollar have contributed significantly to GDP growth at a time when the U.S. economy has faltered. However, the dollar has strengthened recently against major world currencies. Higher energy costs and credit market turmoil also have adversely impacted economies in Europe and elsewhere.

Credit Markets: Although government-sponsored agencies Fannie Mae and Freddie Mac continue to dominate the headlines, recent news has shifted to the Federal Deposit Insurance Corporation (FDIC). According to the FDIC, the number of 'problem' banks facing short-term liquidity concerns has risen to 117, up from 90 in March. So far, nine banks have collapsed this year. For perspective, the number of bank failures exceeded 1,000 in the early 1990s.

Energy: Changing consumer habits have helped lower the price of oil from its July record level, but energy costs still remain high by historical standards, and any meaningful resurgence will hinder growth.

Energy remains the biggest wild card, at least in the short run. When it comes to oil, policymakers have little say over prices in the near term. A gradual decline to $80-$90 per barrel may provide a much-needed stimulus to the U.S. economy.

Equity markets moved modestly higher in August, marking the first positive monthly performance since May. The Standard & Poor's 500 Index (S&P 500) rose 1.4% for the month, while the broader-based Russell 3000 advanced 1.6% for the same period. The Dow Jones Industrial Average gained 1.8% in August while the technology-heavy NASDAQ Composite Index added 1.9%.

Equity returns were volatile during the summer. From Memorial Day through Labor Day, the S&P 500 fell -6.7%. However, the performance for the first half of the summer was markedly different from that of the second half. As oil prices soared, equity prices fell. By July 15, the S&P 500 was down -11.7%. But as oil prices retreated, equities rebounded 5.5%. If not for the problems surrounding the global credit markets and slowing economies overseas, equities might have enjoyed an even more significant recovery.

More Market Information

The performance of international equities was positive or negative, depending on how returns are measured. Based on local currencies, the MSCI EAFE Index gained 1.0% in August, a return just slightly below that of the S&P 500.

But for U.S-based investors, when measured in dollar terms, the MSCI EAFE fell -4.0% for the month due to a strengthening dollar against major world currencies (the dollar appreciated by roughly 5.3% in August). Helping bolster the dollar was a weakening economic outlook for many developed market countries. The dollar could continue to gain ground against local currencies in areas where the economic outlook is less favorable than in the U.S. By region, the Pacific market (excluding Japan) was lower by -5.5% for the month, followed by Europe (-4.4%) and Japan (-4.0%).

Emerging markets continued their recent decline, dropping -7.9% in August. As with developed markets, much of the return was attributable to a favorable dollar. By country, Brazil and China experienced losses of -9.8% and -8.2%, respectively, while India fared better, falling only -1.2%. The Lehman Brothers Aggregate Bond Index rose 0.9% in August. The best-performing sector was U.S. Treasuries, which advanced 1.3% for the month, while corporate bonds managed a gain of 0.7% for the same period. Longer-term maturities outperformed shorter-term maturities 1.7% to 0.4%, respectively.

The benchmark 10-year Treasury yield fell as low as 3.76% in August after trading as high as 4.0%. Amid new concerns surrounding the credit markets - such as foreclosures and bank failures - investors looked to the safety of Treasuries, which pushed the yield down to a level not seen since the beginning of May. The yield curve, or the relationship between long- and short-term yields, narrowed slightly during the month.

The FTSE-NAREIT Index gained 1.9% in August after posting a 2.8% return in July. So far this quarter, REITs have been a top-performing asset class, surpassing both equities and fixed income. By sector, apartment REITs have delivered the best returns recently as apartment owners have benefited from a weak housing market.

Despite this positive performance, REITs have struggled during the ongoing credit crisis, and many REITs now trade close to or below their net asset value. When credit market conditions stabilize, REITs could become less volatile as well.


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International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods.

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The Market Commentary provided represents the opinion of National Planning Holdings and should not be considered a recommendation to buy or sell securities. All information presented is believed to be reliable, however, we can make no representation that the information contained herein is accurate or complete in as much as information we relied on comes from third-party data providers who make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide. You agree not to rely on the information contained herein and to hold us harmless for inaccuracies of any kind relating to such data. The trademarks and service marks contained herein are the property of their respective owners. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of National Planning Holdings.
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