Calvert News & Commentary

August Market Commentary: Markets Continue to Find the Positive in Mixed Economic News


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By Natalie Trunow, Chief Investment Officer, Equities
Calvert Asset Management Company, Inc.

Natalie Trunow, Head of Equities

During August, economic data continued to confirm that the pace of economic deterioration has slowed, and – perhaps – that we have reached the bottom of the economic cycle. Having said that, the overall economic picture remained troubled and many sectors of the economy generated conflicting data, even as signs of improvement became more visible.  For example, despite the successful “cash for clunkers” program, overall U.S. retail sales fell unexpectedly, due to the continuing loss of jobs. The Labor Department reported in August that payroll losses slowed to 247,000 from 443,000 reported in July, but that new claims for unemployment insurance rose toward the end of the month.  Similarly, while housing starts for single-family units rose for a fifth straight month, overall housing starts decreased.

During the month, global equity markets continued to rally. As was the case in July, financial markets focused on positives – specifically, on government stimulus and the rebuilding of inventories – and reacted less to negative data. The Russell 1000®, Russell 2000®, and MSCI EAFE® indexes were all up for the month, advancing 3.63%, 2.87%, and 5.44% respectively. The MSCI Emerging Markets Index paused after a strong rebound off the March bottom, declining only 0.33% in August.

From the market’s lows in March through the end of July, U.S. large-cap stocks, as measured by the Russell 1000, advanced over 50%, while the MSCI Emerging Markets Index and the financial services sector were up over 60% and 120%, respectively, for the same period. This strong rally left observers wondering whether quickly-swelling stock valuations had become prematurely rich given the vulnerable state of the global economy with its still worrisome financial system, employment picture, and housing market. In some cases, such as in emerging markets, valuations reached pre-crisis highs, making the ability of markets to stay at these levels a questionable proposition. It is clear that corporate earnings are depressed due to the economic recession, potentially making valuations seem deceptively high.  However, the pace and strength of the recovery, and hence, the pace of earnings recovery and the related valuations, are still very much in question.

During the month of August, new data confirmed that, as a group, the larger banks that present systemic risk were stabilized by the unprecedented, coordinated efforts of governments across the globe. Even AIG announced, at the end of the month, that it expects to repay its bailout funds to the government. Many medium- and smaller-sized banks, however, are still very much at risk, with levels of non-performing loans continuing to rise, and with additional write-offs threatening their survival.

In the short term, given the pace and magnitude of the 50%-plus rally of the past few months, the risk seems to be on the downside, with potential profit-taking likely. We are still optimistic about the longer-term economic recovery, but remain cautious about the pace and speed of the economic recovery in the short run, placing higher probability on a “smile”-shaped vs. a V-shaped recovery.

#9346 (9/09)

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