Authored by :
Michael G. Dow, CAIA, CFA, CPA, Chief Investment Officer
Julien R. Frazzo, Director of Risk Management and Securities Research
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The Quick Facts
- Market jitters return in February, characterized by concerns over inflation and its impact on rates
- The S&P 500 and Nasdaq Composite lose 2.4% and 1.0% in February, respectively, but are still higher year to date
- Tech was the only S&P 500 sector to post a gain, with Energy bringing up the rear
- U.S. fixed income performances were mostly negative
- Inflation remains sticky as highlighted by the Personal Consumption Expenditures (“PCE”) Price Index acceleration in January
- Negative corporate earnings growth for the first time since 2020
After a strong performance in January, stocks retreated in February as economic data and comments from the Fed prompted market participants to reconsider the odds that the central bank would hike rates to a higher level than market forecasts and keep them elevated for longer than was initially expected.
A sharp jump in Treasury yields in February dented investor sentiment for stocks. The S&P 500 fell 2.4% in February but remains up 3.7% YTD. The Nasdaq Composite Index did not manage to avert a monthly decline either, but the index is up 9.6% YTD. The dollar index rose 2.7%, the most this month since September. The benchmark 10-year Treasury yield, meanwhile, climbed more than 40 basis points in February. Bond traders now no longer view the odds of a Fed rate cut this year as better-than-even, a shift from what they were expecting just a month ago. Traders are pricing U.S. rates to peak around 5.5% this year, compared with about 5.0% just a month ago.
Outside of the economic data and Fed rate decision, February also saw the second half of 4Q 2022 earnings season. The overarching message is that sales were stronger than profits. Earnings for the quarter are expected to decline -3.2%, and excluding the energy sector, they would be down -7.4%.
February Asset Class Performance
While this is the first quarter of declining profits according to consensus estimates, it would be the third excluding the positive contribution of the energy sector. The earnings surprise factor for the S&P 500 this quarter has fallen to 1.1%, the lowest reading dating back to the financial crisis. It is also well below the long-term average of 4.1%.
On a total return basis, only one of eleven GICS (Global Industry Classification Standard) sectors finished in the green in January: Technology, with a meager 0.4% positive return. The remaining ten sectors were all in the red, with Energy, Utilities and Real Estate posting the worst monthly numbers at -6.9%, 5.9% and 5.9%, respectively. YTD total return numbers show great dispersion, from -7.8% for Utilities to 12.7% for Consumer Discretionary.
On a total return basis, large-cap growth stocks were the top performers for the month, with the Russell 1000 Growth index sliding 1.2%. Large-cap value stocks were hit harder as the Russell 1000 Value index fell 3.5%. Despite the short-term reversal, the outperformance of Value over Growth remains a major longer-term investment theme in an environment where long-dated cashflows of growth companies are discounted at higher rates. The ESG segment of the market, as measured by the MSCI USA ESG Select Index, was down 2.3% in February, in line with the S&P 500. Over the last three years, the ESG index is up 44.5% and approximately 3.5% ahead of the S&P 500 on a total return basis.
January’s Consumer Price Index (“CPI”) MoM released on February 14 was in line with expectations of 0.5% while YoY came in at 6.4%, above expectations of 6.2%. However, the headline PCE data released on February 24 came in hotter, reporting an increase of 0.6% MoM vs. 0.5% estimate and 5.4% vs. 5.0% on a YoY basis. The market had been pricing in rate cuts in the back half of the year, but those expectations have largely disappeared with the assumption now that the Fed will keep rates higher for longer. The terminal rate has risen to close to 5.5%.
The yield on the benchmark U.S. 10-year Treasury closed February at 3.92%, below the October peak of 4.24%, but 41 basis points wider than at the end of January. Yield on the shorter-term 2-year shot up by 61 basis points in February and now yields 4.82%. The yield curve remains inverted with the U.S. 2-year treasuries yielding 90 basis points more than 10-year maturities as compared to a 55 basis-point inversion at the beginning of the year.
Oil prices as measured by the WTI Crude Oil $/bbl. declined by another 2.3% in February to $77.1/bbl. WTI traded as high as $123.70 back in March 2022, a 14-year high. Gold and silver posted their worst monthly performances in more than a year. Gold spot price closed 5.3% lower in February at $1,827/oz. That was the worst month for the metal since June 2021, when it lost 7%. Surprisingly, cryptocurrencies were up in February in an otherwise risk-off month, despite their high beta profile. Bitcoin and Ethereum were up 0.9% and 1.8% for February, respectively, bringing their YTD total returns to 39.9% and 33.9%. The U.S. dollar ticked lower for four consecutive months through January on the expectation that the Fed will slow the rate of interest rate hikes as inflation pressures ease. In February, the U.S. Dollar Index (DXY) rose 2.7%, with expectations of higher U.S. rates the most since September.
Volatility has been common since the Fed began its rate hiking cycle last year. The S&P 500 has seen 18 sessions with gains or losses of at least 1% this year, equal to the first two months of 2022, which eventually saw 122 such trading days on the year. The CBOE Volatility Index (or “VIX”), also known as the fear gauge, has been trading in a narrow range between 18 and 23 so far this year, and we have yet to see a spike in the 30s. While equity investors look to the VIX index as a measure of volatility, bond investors focus on the ICE BofA MOVE (MOVE) Index, which measures bond market volatility. The MOVE Index more than doubled last year to as high as 16. After closing below 100 in January, the MOVE ended February at 123.6, a high level that reflects the uncertain rate environment.
Chart of the Month – Personal Consumption Expenditures Price Index (PCEPI)
According to the Bureau of Economic Analysis (BEA), a U.S. government agency, the consumer accounts for about two-thirds of domestic spending and is a significant driver of GDP. Personal spending and income statistics are released monthly in the BEA Personal Income and Outlays report. The report also includes the latest calculation for the PCE Price Index, which measures price changes and provides a view of inflation. In 2012, the PCEPI became the primary inflation index used by the Fed when making monetary policy decisions. The Fed prefers the PCEPI over the CPI because the PCEPI better reflects changes to consumer spending, such as selecting substitute goods due to price changes, and it covers a broader range of spending.
The Fed’s preferred inflation gauges unexpectedly accelerated in January and consumer spending surged after a year-end slump, adding pressure on policymakers to keep ratcheting up interest rates. The PCE price index rose 5.4% from a year earlier and the core metric was up 4.7%, both marking pickups after several months of declines. The PCE price index increased 0.6% from a month earlier, the most since June. Excluding food and energy, the core PCE price index also climbed 0.6%. Both advances exceeded projections. The resilient spending and stubborn inflation suggest that the Fed’s path to taming prices and demand will be bumpier and longer than data for late 2022 had previously indicated.
Quote of the Month
“The stock market is filled with individuals who know the price of everything, but the value of nothing .” — Phillip Fisher
Major Asset Class Dashboard
Important Disclosure: This report is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. All investments involve risks, including the loss of principal. Investors should consult with their financial professional before making any investment decisions. Past performance is not a guarantee of future results.
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