Equity Overview

Stocks continued their remarkable rally in August, buoyed by impressive corporate earnings and strong consumer confidence. The S&P 500 hit a milestone on August 22, when its current bull run became the longest in history, lasting 3,452 days (nine and a half years).  It produced a gain of 324% over that time.

Growth stocks outperformed value stocks, reversing a two-month trend.  Leading sectors included technology, consumer goods and services, and health care.

Second quarter earnings reported in August continued to reflect strong gains.  With 99% of S&P 500 companies reporting, the blended growth rate was 25%, even higher than the 24% reported in July.  In addition, 80% of companies beat consensus earnings expectations and 72% beat consensus revenue expectations, both numbers higher than their 5-year averages.

Macro Overview

As was the case in July, tariffs and trade wars were headline news in August, but again had little impact on the U.S. stock market.  However, European indices were weak, as were Asian indices (except for Japan).  Turkey had some short-term impact on international markets, as its currency continued to collapse.

Economic data reported in August were mixed.  Manufacturing moderated from previous levels and housing was weak.  However, retail sales continued strong.

The Fed kept its benchmark short-term interest rate unchanged at its August meeting.  But there are cautionary signs on the horizon.  As inflationary pressure grows, analysts project a steady pace of Fed increases for the next several quarters, with the rate reaching about 3.00% to 3.25% by the end of 2019.  Long-term rates are also projected to increase.  While the broader economy may absorb these increases, there is likely to be a more immediate effect on consumers as banks raise floating rates on credit cards and adjustable rate mortgages.  In addition, rising rates cause an increase in the debt obligations of the U.S. government, which is already running a deficit projected to exceed $1-trillion per year.  This dynamic will command our attention in the coming months.