Top of the markets: US stocks march on, but UK holds back Europe

We look at the August performance of S&P market indices broken down by country, sector and factor.

The US market showed no sign of slowing down in August, posting its best month since April. The S&P 500 gained a total of 7% throughout August, bringing its performance since the start of the year to 9.7% (on 3 September, the US market took a knock, with technology stocks among the hardest hit).

August was also good on the mid- and small-cap front, with the S&P MidCap 400 and the S&P SmallCap 600 both gaining 4%.

The strong performance of US markets was largely down to continued US Federal Reserve stimulus. In particular, the central bank said that it would change its policy to target an average inflation rate, implying lower interest rates for longer.

Lower interest rates are good news for “growth” stocks. When interest rates are lower, the future earnings of growth companies are deemed more valuable, meaning higher share prices.

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This can be seen in the performance of the S&P 500 Growth index, which returned more than 9.5% over the course of August. That was a continuation of its strong performance this year, with the S&P 500 Growth index seeing year-to-date returns of 26.5%.

In terms of sectors in the S&P 500, information technology was the best performing, with a monthly return of just over 12%. This should not come as much of a surprise to anyone. Tech companies in the US tend to be growth stocks, meaning that they have been key beneficiaries of the US’ monetary policy. On top of that, many tech firms are deemed to be immune from the economic difficulties brought about by Covid-19.

While the US has continued to outpace the rest of the world, returns for other markets started to pick up in August. The S&P Developed Ex-US BMI and the S&P Emerging BMI were up roughly 5% and 3%, respectively.

When it comes to Europe, performance was mostly positive. The S&P 350 Europe index returned just under 3% over the course of August. This was largely driven by eurozone constituents in the index. As Tim Edwards, managing director of index investment strategy at S&P Dow Jones Indices, notes: “Nearly every country contributed positively, with Germany and France contributing the most towards the total.”

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UK equities, which account for more than 20% of the index, held back the performance. Over the course of the month, the S&P United Kingdom index, was slightly poorer, with a monthly return of just over 1.5%. In contrast, the S&P Eurozone 350, which strips out the UK and other non-eurozone economies, returned almost 3.6%.

The UK has suffered for several reasons, including the relatively small number of tech stocks in its index and overall worse economic performance compared to other countries.  

All three indices, however, are still negative on the year. Year-to-date the S&P Europe 350 is down 11.6%, the S&P Eurozone 350 is 10.2% in the red and the UK’s index is down by more than 20%.

The best-performing indices in Europe were those measuring small and mid caps. Both the S&P Europe SmallCap and S&P Europe MidCap gained 5% and 4%, respectively, comfortably outperforming larger cap indices. This better performance of smaller stocks also meant the Europe 350 Equal Weight index saw better performance than its market-cap weighted equivalents, returning 5% over the month.

Sector-wise, discretionary and industrials came out on top in August, rising 8% and 7%, respectively.

Source: S&P Dow Jones Indices