SPY, QQQ Hit 4-Year Peak in August
Major ETFs hit their highest levels since 2008 in quiet trade in August and then stalled, anxiously awaiting Fed Chairman Ben Bernanke’s speech Aug. 31 at the annual central bank meeting in Jackson Hole, Wyo.
With one day left in the month, theSPDR S&P 500 ( SPY ) added 2.13%, rising for a third straight month.SPDR Dow Jones Industrisal Average ( DIA ) ticked up 0.28%.PowerShares QQQ ( QQQ ), a basket of the largest 100 nonfinancial stocks on the Nasdaq, lifted 4.55%.
The failure of the faster growing and more speculative firms in theiShares Russell 2000 Index ( IWM ) to hit a new high on top of low trading volume questions the sustainability of the market’s uptrend, said Gabe Varga. He is president of Indianapolis-based Axiomix, an investment research firm catering to mutual fund and ETF investors.
“Some kind of good news is needed to break out decisively,” Varga said. “Unfortunately, investors do know that September and October have often brought severe corrections in market history.”
While Bernanke’s words moved markets in the past, some market watchers doubt the Fed could enact more economic stimulus ahead of the election.
“Such a move now could be criticized by both sides as either baldly political support for the incumbent, or proof that current economic plans are failing and that a change is needed in November,” Tom McClellan, founder of the McClellan Market Report, wrote in a daily client note.
Foreign ETF Performance
IShares MSCI EAFE Index ( EFA ), tracking developed foreign markets, added 2.62% for the month, led by a rebound in Spanish and Italian stocks. Outpacing all global markets in August,iShares MSCI Spain Index (EWP) jumped 10.31% as it bounced back from an 11-year low. This appears to be a countertrend rally in a long-term downtrend. It’s still trading below the 200-day average, which is bearish.
Catalonia asked Spain’s central government for a bailout this week, intensifying the country’s need for an international bailout, which it’s trying to avoid. The region, home to Barcelona, is the third to ask for aid. Spain and Italy hope the European Central Bank will hash out a plan to buy their bonds at the ECB’s monthly meeting next week to lower their borrowing costs.
The markets have rallied ever since ECB President Mario Draghi said the bank would do “whatever it takes” to save the euro.
“That has been widely interpreted as meaning they have found an end-around play that will allow the ECB to undertake an American style (quantitative easing), said Bill DeShurko, founder of 401 Advisor LLC in Centerville, Ohio. But “it’s just not that easy due to (European Union) treaty.”
Chinese materials and infrastructure stocks weighed oniShares MSCI Emerging Markets Index (EEM), which gave back 0.48%.Global X China Materials ETF (CHIM) lost 5.56%.EGShares China Infrastructure (CHXX) fell 4.36%.
Stockpiles of unsold materials and retail goods abound in the world’s second-largest economy amid slowing economic growth. GDP slowed to a three-year low of 7.6% in Q2. Until this year, China’s GDP grew more than an average annual 9% the past 20 years. Rising labor costs pushed manufacturers to send production to Thailand and the Philippines, where stocks boomed this year.
The Chinese government will likely stimulate the economy soon to avoid a “hard landing,” which would likely bolster stock prices, said Douglas Stewart, a portfolio manager at Sherwood Forest Capital Management.
Underperformance in emerging markets has driven valuations so low that investors will eventually look past the headlines to take advantage of low prices, says Bill Spitz, former vice chancellor for investments at Vanderbilt University.