The past few months have seen some wild moves up and down, but August seemed to be a particularly interesting month for stock market investors. Equities confused investors as markets dealt with everything from large losses to a general sense that prices may be on the mend. Economic reports still confirm a slow recovery, despite growing weakness in consumer sentiment, labor markets, and manufacturing. Investors focused on corporate warnings and the threat of war with Iraq, both particularly strong market-moving events. The FOMC met and left the federal funds rate target unchanged. Their adjoining statement emphasized a slow recovery -- no help for equity prices. While mostly upbeat comments by Greenspan and other Fed officials are normally market-moving events, it seemed that equity investors, hopeful for greater guidance, ignored the policymakers.

The month of August began with bad employment figures, which combined with fresh batches of earnings warnings to send major indices down sharply. Despite some strong moves higher later in the month, a pessimistic attitude regarding corporate profits remained prevalent. Major indices finished the month with mixed results as positive and negative days largely offset each other. Stock prices rallied sharply on several occasions, with the Dow finally rising back above the 9,000-level on August 22nd. Investors who believed that the worst was over went bargain hunting, helping the market particularly in the first full week of August. The days of August 6th through 8th were particularly strong trading sessions, reversing much of the major losses suffered in the first three sessions of the month. But positive momentum could not be maintained as the end of the month saw a number of corporate earnings warnings and weaker economic reports.

Stock prices in the technology sector were generally higher throughout the month, although telecommunications stocks continued to suffer from poor profits and negative forecasts. Retailers had another fairly stagnant month as hot weather discouraged store traffic, although discount retailers remained a bright spot in this otherwise flat sector. Energy stocks continued to trade well as oil prices surged through the month of August. Health care stocks showed little movement after declining for two straight months on product difficulties and earnings warnings. Housing-related stocks continued to outperform, as economic reports continued to show resilient strength in this sector. Financials gained nicely throughout August as leading investment banks reported higher corporate profits. Travel and leisure stocks declined sharply. Labor problems and looming bankruptcies in the airline industry were the largest contributors to these declines.

Looking at the performance of major indices week-by-week, only the final Friday of the month traded lower than the previous week. The best performances, August 6th, August 8th, and the 19th, came on days when major technology and financial stocks showed better earnings, similar to July's figures. There was some strong momentum up to the 22nd, when the Dow closed trading with its only day above the 9,000-point level, although the end of month brought investors back to earth. The Dow closed the month with a 0.8 percent loss, similar to the NASDAQ's decline of 1.0 percent. The Russell 2000 fell by 0.4 percent in August. The S&P 500 increased for the month, finishing up 0.5 percent for August. Similarly, the market-encompassing Wilshire 5000 index also posted a 0.4 percent gain for the month.

Treasury Markets:
Confusion!?
The Treasury market continued to move in the opposite direction from equity markets throughout the month of August. Treasury securities traded well early in the month but fell sharply as equity indices rallied through the middle of August, closing at levels achieved at the beginning of the month. Economic reports still showed that a slow recovery was in progress, although there were several days when they showed economic weakness. Consumer confidence continued to decline, the monthly employment report was fairly negative, and rising weekly jobless claims still showed a weak labor market.

Supply was a looming issue for Treasuries, as the quarterly refunding auctions occurred early in August. Thankfully for Treasury investors, there was room in the market for an extra supply of new 5- and 10-year notes. The Fed's decision to not raise interest rates initially caused some pessimism among Treasury market players, but helping to soften the blow was the Fed's accompanying statement that pointed to continuing weakness in the economy.

As can be seen in the chart above, yields continued to decline from the previous month's figures. Mid-month saw a creeping upward-trend in yields as equities performed well, though this abated before month-end. The 30-year bond traded well throughout August as it outperformed all other Treasury securities, shedding another 38 basis points from its yield. The 10-year note decreased by 28 basis points by the end of August, while the 5-year note declined by 25 basis points. The 2-year note reached an all-time low early in the month, but was only able to pare another 10 basis points from its yield by the end of August. The 3-month bill showed little movement throughout the month and closed with a 2-basis point loss in its yield.

Damir Fonovich, Economist, Econoday