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The Quick Facts

• U.S. equity markets faced several challenges in February, including tariff threats, geopolitical tensions, and a decline in consumer confidence.  
• Despite reaching two all-time closing highs, gains were quickly erased, and the S&P 500 closed February down -1.3%.
• Small Caps performed worse than their Large Cap peers, with the Russell 2000 Small Cap Index down 5.4%.
• Non-U.S. equities outperformed in February, with the Europe, Australasia, and the Far East (EAFE) Index up 2.0%, while the Emerging Markets (EM) Index rose 0.5%.
• Treasury yields dropped to fresh lows for 2025 due to growing concerns about slowing growth, with the 2-year U.S. Treasury closing February at 3.99%.
• The Federal Open Market Committee (FOMC) minutes from the January meeting highlighted concerns over government policy actions on growth and inflation, balanced by the positive impact from an easing of regulations.

Despite reaching two all-time closing highs, gains were quickly erased, and the S&P 500 closed February down 1.3%. U.S. equity markets faced several headwinds in February, including potential tariffs, a decline in consumer confidence, and geopolitical tensions. Small Caps fared worse than their Large Cap peers, with the Russell 2000 Small Cap Index falling 5.4%. Heightened inflation concerns and uncertainty regarding potential Fed rate cuts continued to weigh on investor sentiment.

The U.S. economy’s growth slowed to 2.3% in the fourth quarter of 2024, with indications that this deceleration is persisting into the first quarter of 2025. Factors such as cold weather and tariff-related uncertainties contributed to this trend. President Trump’s unpredictable trade policies, including threats of new tariffs on Canada, Mexico, and global steel and aluminum imports, are lifting market uncertainty.

February Asset Class Performance

Large Cap Value stocks outperformed Large Cap Growth stocks, with the Russell 1000 Growth Index down 3.6% in February (+20.6% over the last twelve months) compared to a 0.4% increase for the Russell 1000 Value Index (+16.1% over the last twelve months). Over the past three years, the Large Cap Value Index has lagged the Large Cap Growth Index by 23.3%. The Russell 2000 Index, a key measure of smaller companies, had a weak February with a -5.4% return. The ESG segment, as measured by the MSCI USA ESG Select Index, fell 1.8% in February, trailing the S&P 500 by 0.5%. Over the past three years, the ESG index appreciated 35.8%, lagging the S&P 500 by 6.7%. Non-U.S. equities outperformed in February, with the EAFE Index up 2.0%, while the EM Index rose 0.5%. However, over the past three years, both EM and EAFE significantly underperformed the S&P 500, with underperformance of -52.1% and -19.8%, respectively. Global Industry Classification Standard (GICS) sectors performance in February was mixed. Defensive sectors outperformed, led by Consumer Staples (+5.2%), while Consumer Discretionary (-7.0%) and Technology (-2.3%) lagged.

On February 1, President Trump announced plans to impose 25% tariffs on imports from Canada and Mexico, aiming to address issues like illegal immigration and drug trafficking. These tariffs were delayed by one month following negotiations. On February 26, President Trump announced a 25% tariff on goods imported from the European Union, further escalating trade tensions. As of March 3, 2025, the U.S. is on the verge of implementing significant tariff measures affecting key trading partners. These developments have prompted discussions about the broader economic impact, with figures like Warren Buffett describing tariffs as “an act of war, to some degree,” emphasizing that such measures often translate into higher costs for American consumers. As explained by Apollo’s Chief Economist, “There are often adjustment costs associated with changing policies. Laying off government workers puts upward pressure on unemployment, and imposing tariffs increases prices and lowers demand for foreign goods. How significant the impact of these policies will be on the economy depends on the magnitude and duration of each policy.”

In his semi-annual testimony before Congress, Fed Chair Powell said the central bank is not in a rush to reduce interest rates, as he outlined keeping interest rates unchanged if inflation does not subside or lowering them if the economy slows significantly. The FOMC minutes from the January meeting spoke of concern over government policy actions, including tariffs, on the economy and inflation, balanced by the positive impact from an easing of government regulations.

Treasury yields dropped to fresh lows for 2025 due to growing concerns about slowing growth. The 10-year U.S. Treasury closed February at 4.21% vs. 4.57% at the end of December 2024, 3.88% at the end of December 2023, and from a peak of 4.99% in October 2023. Shorter-term 2-year U.S. Treasury closed February at 3.99% vs. 4.24% at the end of 2024. The 2-year and 10-year Treasury yield curve dis-inverted in September 2024, with the 10-year yield now 22 basis points higher than the 2-year yield. The U.S. Aggregate bond index was up 2.7% in February. The Municipal Bond Index was also up 1.5% in February, while U.S. Corporate Investment Grade and U.S. High Yield closed February up 2.6% and 2.0%, respectively.

Equity market participants have seen a rise in volatility amid a set of risks ranging from an economic slowdown, geopolitics, and AI valuations. The VIX traded as high as 22.4 in February and closed the month at 19.6, above its post-Great Financial Crisis average of 18.5. Bond market volatility, measured by the BofA MOVE Index, traded in a tight range, with the index closing February at 104.5 vs. 108.7 a year ago and above the long-term average of 94.5.

Gold gained another 2.1% in February ($2,858/Oz, +8.9% YTD), while Bitcoin fell -17.5% ($84,212, -10.1% YTD). This upward trend in Gold was influenced by factors such as speculation about tariffs, increased central bank purchases, particularly from China and India, and geopolitical uncertainties. Gold is also considered a hedge against inflation. Oil futures, as measured by the WTI Crude Oil $/bbl., were down 3.8% in February to $69.8/bbl. due to the same concerns over U.S. economic growth, potential tariffs, and geopolitical tensions. The U.S. Dollar Index, which indicates the general international value of the U.S. Dollar, was down 0.7% in February but remains up 3.5% over the last 12 months.

Chart of the Month – U.S. Budget Deficit and Primary Deficit Detail, % of GDP 

The U.S. budget deficit and primary deficit as a percentage of GDP provide important insights into the country’s fiscal health. The U.S. can borrow money at lower interest rates due to the high global demand for dollars, partly because the dollar is the world’s primary reserve currency. However, a growing budget deficit can lead to higher interest rates over time, making borrowing more expensive.

The budget deficit is the amount by which the government’s total outlays exceed its total receipts for a fiscal year. For fiscal year 2025, the federal budget deficit is projected to be 6.2% of GDP.

The primary deficit excludes net interest payments on the national debt, providing a clearer picture of the government’s fiscal stance by focusing on the difference between revenues and non-interest expenditures. For fiscal year 2025, the primary deficit is projected to be 2.1% of GDP.

Over the past 50 years, the average budget deficit has been around 3.8% of GDP. The current projections indicate a higher-than-average deficit, reflecting ongoing fiscal challenges. Budget deficits will weigh on yields until resolved.

Quote of the Month

“I could end the deficit in five minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of Congres are ineligible for re-election” – Warren Buffett

Major Asset Class Dashboard

Curated by Julien Frazzo, Deputy Chief Investment Officer and Michael G. Dow, CAIA, CFA®, Chief Investment Officer

 RELATED LINKS

Macro & Markets: February 2025 – An Update from Chief Investment Officer, Michael G. Dow

Beacon ‘Pointe of View’ – A Market Update February 2025

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