It wasn't only the weather in February that was unusual. After the S&P 500 gained 6% in January, stocks dropped 2.6% to finish the month at 3,970. Ten-year U.S. treasury yields went back up to 3.92% from a February 2nd low of 3.55%. The 2-year closed at 4.80%. Oil ended at approximately $76.77.
With the S&P 500 up 14% from its November 2022 intraday low of 3,488 and 17.4% down from the January 2022 intraday high of 4,818, the old song "Stuck in the Middle with You" comes to mind.
The U.S. economy continues to show strength with an unemployment rate touching 3.4%, a level not seen since 1969! Real gross domestic product (GDP) increased at an annual rate of 2.7% in the fourth quarter of 2022. This good economic news in February has been bad for stocks as inflation appears to be stickier and significantly above the 2% level that is driving Fed policy.
Market bulls are looking forward to rate cuts while the bears see more Fed rate rises ahead. Six-month U.S. treasury bills now yield 5.14%!
This "inverted yield curve" continues. While this has been a fairly reliable harbinger of recession, economists keep on wondering when and if it will occur. In February the debate widened. In addition to “hard” or “soft landing,” pundits posited “no landing”. “No landing" is a scenario where global economic growth is resilient and inflation stays higher for longer. Investors who lean toward this view are dialing back appetite for both risk assets and government debt. There is rising belief, still small, that the Fed raises 50 bps instead of 25 bps at its next meeting. This dynamic leads us to believe the rest of the year will be volatile.
Earnings are slowing but not by much. With 82% of S&P 500 companies reported for Q4, companies have exceeded estimates by 1.3%, according to FactSet. 325 companies have mentioned inflation during their Q4 earnings calls, versus an average of 157 over the past 10 years.
Inflation is the problem which won't go away. With exorbitant government spending not being scaled back, the Fed is limited to a policy of raising rates to slow down economic activity.
If the Fed and most economists admit that the current economic scenario is very atypical, highly unusual, and "the most difficult to fathom in my career" as Brian Westbury of First Trust said recently, it is little wonder that investor sentiment continues negative despite 2023's better price action.
We will stay the cautious course we have been on for much of the past year. Short term treasuries yielding over 5% offer a safe harbor. We also continue to look for opportunities to profit which increase when prices plunge.
We are getting the first vestiges of Spring here in North Carolina.
Enjoy the season of new beginnings!
Doug Coppola - Executive Director & Investment Committee Chairman
Steve Lindgren - Chief Investment Officer & Partner
Bob LeBeau - Research Director & Investment Committee Executive