Equities began the month of August at a similar pace to July, as low volumes mixed with continuing profit warnings hit the markets; pessimism continued to rule the month. The Dow Jones Industrial Average fell off drastically for the month as pessimism and economic data grew worse throughout the month. August began slowly and ended like a stone sinking through water on the Dow, moving below the 10,000-point level. The NASDAQ composite index began the month with a comfortable level above 2,000 points, began a move down under that market comfort level, and then broke through most major support levels in finishing the month around 1,800 points. Earnings warnings from technology companies dominated the news and kept market players from ever gaining any sense of optimism or sustaining any market rallies. The FOMC met on the 21st and 22nd and lowered interest rates by 25 basis points again, but this move did not do much to rally investors, who had hoped that the Fed would indicate that the economy was showing signs of improvement instead of continuing to drag. Investors also had to deal with economic reports showing continuing weakness, including a downward revision to GDP on the 29th that prompted the end-of-month sell-off. Investors are still waiting for interest rate cuts to take effect and continue to look to the Fed to help stop the bleeding.

Sectors that had been performing well in the past few months began a downturn, as the technology-consumer service side declined, with most major technology companies losing some recent monthly gains in August. The retail sector moved slightly higher as reports showed retailers beating monthly forecasts, while transportation and health-care stocks continued July's positive performance in August. The financial sector continued last month's move up and closed the month at similar levels to July. Energy stocks also increased from their July levels, finally starting to show some life after showing some recent negative trends. The continually suffering technology sector led markets down, with this effect bleeding over into the rest of the market by the end of the month.

There were a few major moves in the month, as profit surprises from technology companies on the 10th and 24th kept the Dow up until the end of month drop off, although these moves were not enough to keep the NASDAQ above water. The FOMC's move on the 22nd did not help the equity market because investors are looking for signs of economic and profit rebound. Instead, Fed rate cuts signal economic weakness. Negative days far outweighed positive days across equity indices for the month of August. The Dow finished down 5.7 percent, while the NASDAQ finished down 10.9 percent. The S&P 500 moved similarly, finishing down another 6.6 percent for August. The Russell 2000 moved 3.3 percent lower on the month, while the market-encompassing Wilshire 5000 index moved 6.2 percent lower for August.

Treasury Market- Keep on Moving

The market for Treasuries gained throughout the month of August. Economic reports showed continuing negative conditions during the month and the FOMC lowered interest rates another 25 basis points on the 22nd. This helped to move yields down across the curve in August. While prices of Treasury securities did show some negative downward movement, especially on days that stocks performed well, these securities continued to remain on a positive track as profit worries continue to dominate the equity market. Market players are taking all the negative economic trends from the weak employment situation to the downward revision to GDP on the 29th as signs of a continually slowing economy with recessionary tendencies. This market sentiment is lending optimism for more interest rate cuts from the Fed in the future.

As the chart shows, yields moved down across the board as the underlying trend in the fixed-income market continues to be positive. (Remember that a weak economy translates into favorable trends for the fixed income market.) Treasury securities yields posted fairly drastic declines in August. At the longer end, the 30-year bond declined 15 basis points on the month, and the 10-year note dropped 31 basis points. At the shorter end of the curve, the 5-year note lost 14 basis points, the 2-year note fell 16 basis points and the 3-month bill declined by 16 basis points for the month of August.

Damir Fonovich, Economist, Econoday