February was a challenging month for the U.S. markets as stocks sold off at month’s end due to rising growth and geopolitical concerns. For the month, the S&P 500 lost 1.3%, while the Dow Jones Industrial Average fell 1.4%. The technology-heavy Nasdaq saw the largest decline, falling 3.91% as technology companies were hit especially hard in the late-month sell-off. Below is a summary for the markets in February:
Challenging month for the markets
- Stocks saw a marked sell-off
Bonds continue to rise
- Falling interest rates supported bond returns in February
Solid economic backdrop
- Economic updates showed signs of healthy growth, for now
Risks to Monitor
- Markets face a variety of risks in the coming months
Positive Outlook for the year
- We believe the most likely path forward is for continued market appreciation and economic growth
Although it was a relatively disappointing month for U.S. investors, the fundamentals still show encouraging signs of positive momentum. We’re currently wrapping up fourth-quarter earnings season, and the reports continue to show impressive results for U.S. companies. Per Bloomberg Intelligence, as of February 28, with 97% of companies having reported earnings, the average earnings growth rate for the S&P 500 in the fourth quarter was 14.1%. This is well above analyst estimates of 7.3% at the start of earnings season. Over the long run, fundamentals drive market performance, so the strong earnings growth for the quarter is a good sign for investors.
Technical factors were supportive as well in February. All three U.S. indices spent the entire month above their respective 200-day moving averages. (The 200-day moving average is a widely monitored technical signal, as prolonged breaks above or below this level can signal shifting investor sentiment for an index.) With that being said, the Nasdaq came close to its trendline toward the end of the month. While none of the major U.S. indices ended the month below trend, this will be an area worth monitoring.
While it was a mixed month for stocks, bonds fared much better in February. Falling long-term interest rates helped support bond prices during the month. The 10-year Treasury yield fell from 4.58% at the end of January to 4.24% at the end of February. The Bloomberg Aggregate Bond Index gained a solid 2.20% for the month, marking the best monthly performance for the index since last July.
While the Federal Reserve did not meet in February, futures markets ended the month pricing in between two to three interest rate cuts by the end of the year. This is up marginally from the start of the month when futures markets were pricing in between one to two cuts by year-end.
Although results were challenging for U.S. stocks during the month, the economic updates released in February showed signs of a solid economic backdrop. The January job report showed that 143,000 jobs were added during the month while previous months’ reports were revised up. This brought the unemployment rate back down to 4% for the first time in eight months and signals still high levels of labor demand across the economy.
While the job market remains healthy, there were signs of potential softening in other sectors of the economy. Consumer sentiment continued to slide in February, marking two straight months with declining sentiment. The worsening consumer confidence could be a headwind for spending growth, as historically higher levels of confidence have helped support spending.
Our Perspective
Aside from economic fundamentals, markets face several risks. Domestically, policy uncertainty remains the most pressing challenge for investors. The planned rollout of tariffs on Canada, Mexico, and China at the start of the month is an example of the impact that policy decisions can have on markets. The late-month sell-off in February was partially attributed to the looming tariff deadline, which in Mexico’s case, has been postponed for the time being.
Another potential risk to monitor is the debt ceiling and the upcoming deadline for a partial government shutdown later this month. While we’ll likely see some sort of congressional compromise to avoid an extended shutdown, the possibility for a lengthy deadlock exists and shouldn’t be ignored.
Of course, foreign risks remain as well, such as the continued conflicts in Ukraine and the Middle East. Additionally, the potential for retaliatory tariffs and a new global trade war exists given the recent rise in protectionist policy. Taken as a whole, there is certainly a lot for investors to pay attention to.
All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.