Market Update: February Overview

February delivered an interesting mix for markets, with bonds and international stocks taking the lead. Meanwhile, U.S. equities faced some headwinds as mixed economic data left investors feeling cautious.

Highlights

U.S. Stocks: The S&P 500 started the month strong, even reaching a new all-time high, but ultimately lost steam, ending February down -1.3%. Small-cap stocks had an even tougher time, dropping -5.4%. Slower job growth and weaker profit forecasts from major retailers played a big role in dampening sentiment. It’s clear that uncertainty about economic growth is still a major factor for U.S. markets.

Bonds: In contrast, bonds had a good month. With interest rates falling, U.S. bonds gained +2.2%. The 10-year Treasury yield declined from 4.58% to 4.24%, which helped support bond prices. For investors looking for safety, February offered a chance to breathe a little easier.

International Stocks: On the global stage, international equities continued their winning streak. Developed markets (MSCI EAFE Index) rose +1.9%, outpacing emerging markets (MSCI EM Index) at +0.5%. Standouts included UK stocks, up +3.5% thanks to a rate cut, and Chinese stocks, which soared +11.8% on the back of upbeat corporate earnings. It’s shaping up to be a strong year for international markets.

Equities Recap

It’s been a tale of two worlds for equities. U.S. stocks, once the unrivaled leaders for years, seem to be facing a reality check. International stocks, on the other hand, are enjoying their moment in the sun, benefiting from strong earnings and improving economic conditions abroad.

U.S. vs. International Stocks: While U.S. investors grappled with weaker profit guidance and economic uncertainties, international stocks saw gains. In Europe, strong data in manufacturing and services sectors boosted corporate profits, while supportive central bank policies helped fuel growth. It’s a reminder of why maintaining a global perspective can pay off in investing.

Tech Takes a Hit: February wasn’t kind to tech giants. The “Magnificent Seven” stocks, which include names like Tesla and Alphabet, collectively fell -8%. Tesla had an especially rough month, tumbling -27.6%. For a sector that’s often seen as invincible, February proved that even the biggest players aren’t immune to setbacks.

Small-Cap Struggles: If large caps had a bad month, small caps fared even worse. The Russell 2000 has pulled back -10.9% since December, highlighting how smaller companies are particularly vulnerable in an environment of high interest rates. With many of these firms relying heavily on debt financing, it’s no surprise they’ve been hit harder.

Fixed Income Trends

February highlighted the benefits of diversification, as bonds provided a much-needed counterbalance to weaker equity markets. With yields falling and demand for safety rising, fixed income proved its value yet again.

Bond Gains: Investors turned to bonds as concerns about economic growth mounted. The 10-year Treasury yield dropped steadily throughout the month, reflecting a growing sense of caution. Investment-grade corporate bonds were among the winners, posting gains of +2.0% in February.

Why It Matters: For those worried about stock market volatility, the bond market continues to offer compelling opportunities. Yields remain at multiyear highs, and if rates and credit spreads stay steady, bonds could deliver attractive returns in the months ahead.

Equity Valuations

Investors’ love affair with growth stocks has pushed valuations to dizzying heights. While it’s hard to argue with the appeal of high-growth companies, there’s growing concern that these lofty valuations could limit future returns.

Growth vs. Value: Growth stocks, especially those tied to AI and technology, have been in high demand. Their P/E ratio has soared to 37X, compared to 20X for value stocks. This stark contrast raises questions about whether value stocks might make a comeback if earnings growth broadens beyond just the tech sector.

The Bottom Line: High valuations don’t necessarily mean doom and gloom, but they do suggest that investors should be prepared for more volatility. As always, balance and diversification are key.

Policy and Economic Developments

The government’s focus on reducing spending is already having ripple effects across the economy. From federal job cuts to discussions of a potential “DOGE dividend,” there’s plenty for investors to keep an eye on.

Department of Government Efficiency (DOGE): Federal spending cuts led to 75,000 early retirements and 26,000 layoffs—a major shake-up that raises concerns about potential increases in unemployment. However, there might be a silver lining on the horizon. A proposal for a $5,000 per household "DOGE dividend" is currently under review, promising a potential boost to household finances if approved.

Economic Data: January was a mixed bag. Job growth came in at +143,000, falling short of forecasts. Meanwhile, retail sales saw a decline of -0.9%, hinting at a cautious consumer sentiment. To add to the complexity, inflation remains elevated, making the Federal Reserve's decisions on interest rates more challenging than ever.

As we watch these developments unfold, it’s clear that the interplay between policy and economic trends will be pivotal in shaping the broader landscape in the coming months.

Summary

February painted a complex picture for the markets. U.S. equities struggled amid mixed economic signals and lingering uncertainties, while bonds and international stocks provided some much-needed bright spots for investors. The divergence between domestic and global markets highlights the importance of maintaining a balanced, diversified portfolio. With policy changes, economic data, and sector dynamics all in play, it’s a good reminder that adaptability and a long-term perspective remain key to navigating today’s ever-evolving investment landscape.