What a difference a month makes! 2018 began with strong gains, only to see much of those gains evaporate as volatility returned to the markets amid concerns of continued interest rate hikes by the Fed. The conundrum is that interest rates are rising because of positive economic data: GDP grew 2.5% in the last quarter; unemployment is at a 17-year low; consumer confidence is high; and corporate earnings are up over 15% this quarter. Apparently interest rate hikes trump positive economic data.
The month of February took investors on a wild ride, alternating between large gains and losses. The Dow posted intraday swings of more than 500 points in six sessions, including four days with swings greater than 1,000 points. So far this year we have seen the worst week in two years, as well as the best week in five years.
For the month of February, the S&P 500 fell -3.9%, breaking an unprecedented 15-month streak of gains stretching back to October 2016. On February 8th the markets briefly slipped into correction territory, defined as a drop of 10% from a previous high, although they quickly rebounded. The Dow finished the month down -4.3%, the Russell 2000 fell -4%, and the NASDAQ lost 1.9%.
Interest rates on the 10-year have risen from 2.04% to 2.95% in the past several months, although they are still not back to the highest levels of this bull market. In 2013 rates nearly doubled from 1.63% to 3.0% yet the market gained 32% in 2013 and 14% in 2014. Furthermore, although the Fed has signaled their intent to raise rates several times this year, the increases are starting from historically low levels.
In terms of sectors, Technology was the only sector to finish the month in positive territory. So far this year, the best performing sectors have been Technology (+8.5%), Consumer Discretionary (+5.8%), and Health Care (+3.4%). All three sectors continue their momentum from last year. The worst performing sectors are Utilities (-6.9%), Energy (-6.8%), and Real Estate (-6.5%). The worst performers continue their underperformance from 2017.
West Texas Intermediate crude settled at $61.64 a barrel, posting its first monthly loss since last August. Domestic crude supplies rose by 3 million barrels and record domestic production contributed to the commodity’s decline. The stronger dollar also pressured oil prices, as commodities have an inverse relationship to the dollar.
Economic indicators showed mostly positive results. The Chicago PMI slipped to 61.9 from 65.7 in January, a six-month low, showing a softening in business sentiment. However, any reading above 50 indicates improving conditions. Consumer confidence rose to 130.8 in February from 124.3 in January, the highest level since November 2000. Unemployment remains at 4.1%, a 17-year low. The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.5% in December on a seasonally adjusted basis. Over the last 12 months, the all-items index rose 2.1 percent. On the whole, these numbers reflect a healthy economy and justify further interest rate increases.
The S&P 500 and Dow remain positive for the year, but the volatility witnessed during February serves as a sobering reminder that risks remain present for investors. In general, it appears that the economy is fundamentally sound and the markets should be able to withstand further interest rate hikes from the current relatively low levels. Nonetheless, investors should be prepared for further hiccups by ensuring that their equity exposure matches their risk profile.