Investors Loved Stocks in February (Weekly Insights 03/04/2024)
February Market Recap - Leaping Into March
Key Takeaways:
- Inflation remains a key headwind, keeps Fed hawkish.
- Consumers pull back on spending.
- Global equities continue to climb with U.S. and EM outperformance.
- Treasury yields rise amid Fed’s hawkish tone.
- Commodities lower; energy products display mixed performance.
Global equity markets surged in February despite hawkish Fed commentary and stubborn inflationary pressures which are calling into question the likelihood of Fed rate cuts. U.S. equity markets were higher for the fourth straight month with the S&P 500 and Nasdaq closing out the month at record highs. Bond yields continued to move higher as investors grappled with the expectations of the Fed not cutting rates as aggressively as anticipated. In this weekly, we review the month of February from an economic and asset class perspective.
- Inflationary pressures remain sticky: The Fed’s preferred inflation gauge, PCE Core, increased at the fastest month over month pace in a year, driven by services prices. Additionally, the prices paid to producers (PPI Index) also increased by the most since August 2023.
- Fed remains hawkish on interest rate outlook: The Minutes from the Federal Reserve’s most recent policy meeting indicated members believe the policy rate is at its peak. Members remained cautious when discussing the likelihood of interest rate cuts, however, stating they need “greater confidence” that inflation was improving before cutting rates.
- Leading Indicator Index points to trouble ahead: The U.S. Leading Economic Indicator Index declined for the 22nd consecutive month to the lowest level (102.7) since April 2020. The series has only declined in as many consecutive months during the Great Recession (’07 – ’09).
- Consumers feeling the pressure: Consumers have pulled back on spending to start the year as retail sales fell at the fastest pace since March 2023 and spending on credit cards increased at the slowest since August 2023.
Global Equities - Emerging markets shine: The MSCI AC World Index was higher for the fourth straight month fueled by a surge in U.S. and emerging market equities.
- Emerging markets outperform developed counterparts: The MSCI Emerging Market Index outperformed the MSCI EAFE by the most since July 2023. Equities in China led the rally and snapped a six-month losing streak.
- Growth continues to lead U.S. market rally: Growth outperformed value in the U.S. for the second straight month as the AI frenzy continued to support mega-cap tech names (specifically NVIDIA and Meta).
- Small-caps rally: The Russell 2000 Index was higher for the third time in the past four months despite higher Treasury yields putting pressure on valuations and cost of capital.
Fixed Income - Bond yields climb: The Bloomberg Barclays Aggregate Index fell for the second straight month as Treasury yields moved higher amid the Fed’s hawkish tone.
- Riskier areas of debt outperform: EM debt (USD) and high yield corporates were the best performing areas of fixed income markets. Each were higher for the second straight month.
- Floating rate instruments higher: As inflationary pressures remained stubborn, investors turned to floating rate instruments during the month.
Commodities: The Bloomberg Commodity Index fell for the third time in the past four months in February.
- Energy prices mixed: Natural gas prices plummeted for the fourth straight month on warmer weather impacting demand. Crude oil was higher amid continued geopolitical tensions.