February 2023 Stock Market Commentary
Ethan Pollard | March 08 2023
Financial markets pulled back in February, consolidating their January gains as interest rates and inflation once again took center stage.
The S&P 500, a broad benchmark for large cap US stocks, fell -2.4% on the month and is now up +3.7% year-to-date.
Overseas equities lost -3.5% in February, with the MSCI ACWI ex-US index up +4.3% on the year.
Within fixed income, the Bloomberg US Aggregate Bond index reversed its gains from January as bond markets began to cope with the possibility of “higher for longer” interest rates. Bond prices fell -2.6% in February for a +0.4% full-year return, with the ten-year treasury rate jumping 40 basis points to end the month just shy of 4%.
Commodity prices continued their fall, most notably with natural gas prices down roughly 80% from their August peak, as the Bloomberg Commodity index posted a -4.7% loss in February (-5.2% YTD)
Our proprietary Three Dials were unchanged during the month of February, which we detail below:
- Market Sentiment and Momentum: (Neutral ➖)
Investor sentiment cooled in February as hopes for an accommodative Fed dissipated, leaving major equity indexes caught between a quest for new highs and a re-test of last year’s lows. Until that next major direction of markets is established, we believe we’re in for a sideways holding pattern, which leaves our Momentum Dial in a Neutral position.
- Economic Fundamentals: (Negative ❌)
Inflation continues to cast a shadow of uncertainty over the economic landscape, with an elevated CPI report offsetting what was otherwise a strong month of data releases spurred on by mild winter weather across the globe.
While the economic data may be showing signs of bottoming, it is still too soon to write off the possibility of a recession in the coming year. As such, our Economic Dial remains Negative.
- Valuation: (Neutral ➖)
With the Fed’s renewed commitment to keeping interest rates elevated for the next year, bond yields are re-testing their October highs when the ten-year treasury yield last topped 4%. However, equity markets have staged a double-digit rally from their October lows despite deteriorating earnings.
Taken together, stocks are starting to look more expensive relative to their historical norms, though we’ve not yet seen enough of a move to downgrade our Valuation Dial. For now, Valuation remains Neutral.
Our Three Dials composite reading continues to take a Moderately Defensive approach, with two dials in a Neutral position while one dial remains Negative.
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