Equities were mixed in February, as fears over a bubble in AI investment weighed on tech stocks before the US and Israel launched an attack on Iran over the weekend.
While uncertainty reigns, our data-driven Three Dials allocation framework held steady during the month of February, as we summarize below.
TECHNICAL
While the cap-weighted S&P remains rangebound as leadership at the top has stalled, the equal-weighted index continued to make new all-time highs in February, which along with gains from small caps and international suggests a broadening out of this bull market. While volatility around the conflict in Iran appears to be weighing on sentiment in the preliminary stages, for now a strong uptrend remains intact, and our Technical Dial stays Positive.
ECONOMIC
We got our first look at Q4 GDP in February, which showed weaker than expected growth, likely due in part to the lengthy government shutdown. Most concerning is that real disposable income was flat for the second consecutive quarter, suggesting that the average American is treading water at best. As the threat of a protracted war in Iran threatens to derail an already fragile global economy, our Fundamental Dial remains Negative.
VALUATION
Walmart became the latest stock to pass $1 trillion in market cap, doing so at a valuation that is more expensive than all but one of the “Magnificent 7” stocks. As traditionally steady dividend payers get repriced for exponential growth expectations, caution is warranted, and as such our Valuation Dial remains Negative.
MARKET COMMENTARY
Equities were mixed in February, as fears over a bubble in AI investment weighed on tech stocks before the US and Israel launched an attack on Iran over the weekend.
The S&P 500 fell -0.8% for the month (+0.7% year-to-date), led by the tech-heavy NASDAQ declining more than -3% in February. On the other hand, smaller company stocks continued their strong start to the year, with the Russell 2000 index adding another +0.8% in February for a +6% gain YTD.
Overseas stocks continue to trump their domestic counterparts, with the MSCI EAFE index notching 13 consecutive weekly gains en route to a +4.6% return in February (+10% YTD). Emerging markets have been even stronger, up +5.4% on the month and +15% so far this year.
Within fixed income, bond prices advanced as investors shifted toward safety as the US involvement in Iran appeared more likely, with the ten-year treasury dipping below 4% for the first time since October. The Bloomberg Aggregate Bond Index gained +1.6% in February and is up +1.7% this year.
Commodity markets ticked up on the month, led by precious metals bouncing back from their late-January selloff, with gold prices advancing another +5% for a +20% gain so far this year. Oil prices also advanced in February before jumping another +5% when trading opened in Asian markets opened on Monday.