February Market Recap
The inflation reports released in February were less favorable than forecasted, causing stocks to surrender much of the positive momentum generated since the start of the year.
Wall Street exited a banner January with growing confidence the US Federal Reserve might thread the proverbial needle, meaning: Taming inflation while still avoiding a recession. Yet the latest barometers indicate the fight against inflation could continue longer than initially thought.
The Consumer Price Index (CPI) rose 6.4% year-over-year and the Personal Consumption Expenditures Index (PCE) increased 4.7% from a year earlier. Both revealed inflation that remains stubbornly higher than consensus expectations. As a result, the Fed may extend its rate-hiking campaign leading to still higher interest rates.
All three major US equity benchmarks declined in February. For the second straight month, the NASDAQ was the best performer. At the sector level, Energy (-7.6%), Utilities (-6.4%) and Real Estate (-6.1%) were the biggest losers. Technology (+0.3%) was the only sector to eke out a monthly gain.
Benchmark Returns: February 2023 | YTD 2023
-4.19% | -1.48%
-2.61% | +3.40%
-1.11% | +9.45%
The Bloomberg World Bond Index had a rough month, dropping 3.3% in February. US bonds fared a bit better, declining 2.6%. A reminder that as bond prices decrease, bond yields increase. The yield on the 2-year US Treasury climbed above 5.1% in late February, its highest rate since 2007. Investors should take note of attractive short-term yields.
The most recent jobs report released the first week of February was exceptional. The 517,000 jobs created nearly tripled the consensus estimate of 188,000. The national unemployment rate (3.4%) has fallen to a 50-year low. That’s the good news. Markets, however, seemed to interpret the strong jobs data as further evidence of a resilient US economy, which justifies further rate hikes by the Fed.
Fourth-quarter US GDP was revised slightly slower to show 2.7% annualized growth (versus 2.9% originally). Consumer spending, specifically, has weakened in recent months.
With only a handful of companies yet to report Q4 2022 earnings, S&P 500 companies are trending toward a year-over-year earnings decline of -4.9%, the first decline since 2020.
At the end of February, the forward price-to-earnings (P/E) ratio of the S&P 500 was 17.5 (compared to a 5-year average of 18.5). While economic growth is certainly slowing, stocks overall do not appear particularly expensive. From a wider-angle perspective, the S&P 500 sits 18% below its all-time high and 14% above its mid-October low.
Non-US Developed equities dropped 2% in February. Emerging Market equities fell 6%, though both remain positive for the year.
There are positive signs out of China for the first time in a while. China’s February factory activity surprised to the upside, expanding at the fastest pace in a decade as the Chinese economy attempts to recover from government-mandated COVID lockdowns. In addition, both Fitch and Moody’s increased their Chinese growth forecast to 5% for the year ahead.
Gold gave up some of its recent gains by falling 5.2% in February. Oil prices barely budged, ending the month just above $77 per barrel.
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Stock investing involves market risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. International and emerging market investing involves special risks such as currency fluctuation and political instability. These risks are often heightened for investments in emerging markets. No strategy assures success or protects against loss. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Past performance is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell Index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
MSCI EAFE Index consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
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