U.S. equity markets continued their run of solid performance in August amid the tailwind of strong second quarter earnings reports. However, there was significant dispersion across capital markets, with geopolitical risks, macroeconomic volatility, and a flight to quality driving the U.S. dollar (USD) higher and most non-U.S equity markets lower. There were some concerns regarding weakness in emerging markets (EM) spreading to developed markets.
In a reversal from July, domestic growth stocks outpaced their value counterparts as defined by the Russell 3000 style indices. The IT sector was the primary driver of the outperformance. The sector has enjoyed strong growth trends. The S&P 500 has gone nearly nine and a half years—dating back to March 9, 2009—without a decline of 20% from peak to trough. Based on intra-day pricing, the peak-to-trough decline over this three-month period exceeded the 20% threshold.
Emerging markets came under pressure during August in the face of heightened macroeconomic volatility. Chinese equities remained weak as trade tensions with the U.S. persisted. However, the 25.9% decline of the Turkish lira relative to the USD during the month was the most significant development and exacerbated losses for U.S.-based investors. Frontier equity markets also fell, due largely to the struggles of Argentina. The central bank raised policy rates from 45% to 60% in an effort protect the peso, which has now fallen over 50% relative to the dollar YTD. Another notable factor was currency devaluation by the Venezuelan government.
While the factors that have negatively impacted the currencies of Turkey, Argentina, and Venezuela appear to be idiosyncratic in nature, markets are growing fearful of a contagion. This, in turn, caused the U.S. dollar to rally. The impact on EM currency values was much more profound than the impact on developed market currency valuations. The weakness in developed market currencies was generally more modest and is more attributable to relative growth in the U.S. and central bank policy divergence, rather than fears of an EM contagion.
Marketable real assets posted mixed results in August. Domestic REITs advanced across subsectors. After trending down in recent years due to concern around the growing impact of ecommerce, retail REITs advanced in August. The rally has come on the heels of retailers reporting same-store sales that exceeded expectations over the YTD period. This was aided by strong consumer spending and tax cuts, as well as better-than-expected fundamentals, particularly for higher-quality, well-located assets, which tend to be owned by REITs.
Brent crude advanced due to continued robust global demand, unexpected declines in U.S. inventories, and supply concerns related to declining Venezuelan production and renewed U.S. sanctions on Iran.
Metals and mining stocks declined on further weakness in industrial metals prices. Trade tensions continued to be a headwind for metals prices due to investor concerns that the growing trade war between the U.S. and China will hamper Chinese and global growth and demand for a variety of metals. China is the largest consumer of copper, zinc, nickel, and other metals.
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