Market Perspective for August 29, 2014

Stocks finished another solid week thanks to strong economic data and buyout activity. The S&P 500 Index gained 0.75 percent on the week and the Nasdaq rallied 0.92 percent. The Dow advanced 0.57 percent, while the Russell 2000 added 1.19 percent. Even more encouraging was that the S&P 500 had its best month of August since 2000, gaining 3.8 percent. Both the Nasdaq and Russell 2000 performed even better, as each advanced over 4 percent for the month. The Dow trailed slightly, returning 3.2 percent.

The significant news for the week was the surprisingly strong revision of second quarter GDP. Economists expected the number to fall slightly, down from an initial 4.0 percent to 3.9 percent. Instead, GDP came in higher at 4.2 percent, due to increased business investment. These capital infusions are needed to build factories and buy equipment that will provide for higher productivity and a larger economy in the future.

The higher GDP number followed a big surprise in durable goods orders, which jumped to 22.6 percent growth in July, blowing away forecasts that were mostly below 10 percent. The jump came thanks to a large number of orders for Boeing jets. It was the largest one month increase going back more than 20 years.

It was also announced that Intermune (ITMN) will be taken over by Roche (RHHBY). The news pushed up shares of ITMN on Monday and propelled some biotechnology sector funds to new highs for the year.

Bond investors were not frightened by the strong economic data, and yields fell. The 10-year treasury closed at its lowest yield for year. Similarly, gold prices reacted to the strong economic data by climbing higher. One factor behind the move in both assets may be currency markets. The euro remains weak and is now oversold. German bond yields are also negative out to three years as investors weigh the continent’s economic weakness along with the European Central Bank’s refusal, thus far, to do more. Low German bond yields pull U.S. yields lower, while a weaker euro pushes up gold in euros and could cause enough buying to raise the price in dollar terms as well.

Also helping U.S. bonds and precious metals are the geopolitical events in Ukraine. The Ukrainian government on Thursday claimed Russian forces had entered the country. Financial markets didn’t react much to the news, but the strength in bonds and precious metals could also be a result of safe haven buying in light of current risk in Europe.

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