Key Takeaways:
- Stocks saw a sharp selloff in February, after a strong 2017 and January
- Interest rates spiked as signs of inflation spooked bond investors
- Volatility in the markets has returned and is likely here to stay
February saw a sharp selloff in stocks with the S&P500 dropping 3.69%. 2017 was a rather unusual year as the market steadily went straight up without any major hiccups. According to Clifton Larson Associates, we went more than 400 trading days without a 5% pullback – the longest in history. When we put things into perspective, a stock market drop was overdue as investors seemed to have forgotten what volatility was like. After a strong jobs report, interest rates spiked from an increase in wages caused investors to begin pricing in the prospect of future inflation. The selloff in stocks dramatically hurt the dividend payers the most with steep losses for the month in energy (-10.82%), consumer staples (-7.76%) and telecom (-7.06%) The best sectors for the month were technology (+0.10%), financials (-2.78%) and utilities (-3.86%). Growth stocks outperformed value with the Russell 1000 Growth down 2.62% vs -4.78% for value. Mid-caps were the worst domestic asset class by size as they lost 4.13% while small caps dropped 3.87%.
International stocks were also hit hard by the pullback as the MSCI EAFE Index was down 4.51% while emerging markets lost 4.61%. Russia was the only major country to post a positive return for February, at 0.93%. As we moved into March, global investors are on edge with talk of tariffs and trade wars. Until we get more clarity on what the details will look like, it is difficult to predict the ramifications of potential legislation.
On the fixed income side, bonds fared better than stocks for the month. The Bloomberg Barclays Aggregate Bond Index dropped 0.95% in February. Long term bonds sold off the hardest as rates increased. What was interesting to note is that TIPS (Treasury Inflation Protected Securities) didn’t rally on the inflation news, but rather sold off as their long maturities were out of favor. Yields continued to climb for the month as new Fed Chairman Jerome Powell’s hawkish testimony signaled the Fed may raise rates four times this year on the back of a strong economy.
Moving forward, it looks as though volatility is here to stay in both equities and fixed income. Bond yields are likely going to continue to rise with strong global economic growth and mounting inflation expectations. Corporate earnings look to be strong but could be derailed if interest rates rise too quickly. With the economy showing no signs of slowing in the near term, we think long-term investors should stay the course.
Commentary by:
Bill Roth, CFA
Investment Director
Sources: Wall Street Journal, Morningstar, Clifton Larson