Stocks Trade Higher in February as the Rally Broadens Out

Monthly Client Letter
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®
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Photo Credit: Daniel Mingook Kim, Unsplash

Monthly Market Summary

  • The S&P 500 Index gained +5.2%, underperforming the Russell 2000 Index’s +5.6% return. All eleven S&P 500 sectors traded higher, with cyclical sectors outperforming.

  • Corporate investment-grade bonds produced a -1.9% total return as Treasury yields rose, while corporate high-yield bonds produced a +0.3% total return.

  • International stocks underperformed U.S. stocks. The MSCI EAFE Index of developed market stocks returned +3.0%, while the MSCI Emerging Market Index gained +4.2%.


Stocks Trade Higher for a Fourth Consecutive Month, While Bonds Trade Lower

Stocks traded higher in February, with the rally broadening after large-cap stocks accounted for most of January’s gains. The S&P 500 traded above 5,000 for the first time, setting a new all-time high, and has now returned +21.5% since the start of November. The Dow Jones Industrial Average set a new closing high in February, and the Russell 2000 Index of small-cap stocks outperformed the S&P 500 after trailing by -5.5% last month. The Consumer Discretionary, Industrial, and Material sectors outperformed the S&P 500, while the Utility, Consumer Staple, and Real Estate sectors underperformed.

In the credit market, bonds traded lower for a second consecutive month as two themes caused rates to rise. First, the Federal Reserve told investors it wants more confirmation that inflation will return to its 2% target. This statement effectively pushed back the timing of the first interest rate cut. Second, multiple inflation reports were hotter than expected, hinting at sticky inflation. This year’s bond sell-off suggests the market got ahead by forecasting too many rate cuts. Investors now expect three rate cuts this year, a decrease from the forecast for six rate cuts at the start of the year.

S&P 500 February Sector Returns in %

S&P 500 February Style Returns in %

Commodity Price Index Trades Near a 2-Year Low, But Energy Prices Are Rising

The Bloomberg Commodity Index tracks a broad group of commodities and has been trading at its lowest level since December 2021. It's been a volatile two years. Commodity prices spiked in early 2022 after Russia's invasion of Ukraine disrupted the energy, metal, and agriculture markets. The sharp rise in commodity prices sent inflation soaring above 9% in June 2022, the highest level in 40 years. Since peaking in mid-2022, commodity prices and inflation have both trended lower. The consumer price index rose by 3.1% year-over-year in January 2024, the slowest since March 2021.

Investors and the Federal Reserve are debating the risk of a second inflation wave. The price declines across commodity markets helped ease inflation pressures, but there are questions about whether the trend can continue. The price of crude oil has risen by +9.2% year-to-date and currently trades at a 3.5-month high, while gas prices have risen by +13.3% this year. With the summer driving season fast approaching, there is concern that gasoline prices could continue to rise. Investors will be watching other commodity markets to see if prices start to rise, as that could delay the Fed’s plan to cut rates.

 

Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.

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Stocks traded higher this week, with most of the gains occurring after the election. The S&P 500 reached a new all-time high, nearing the key 6,000 level. The broader equity market rally was notable as investors priced in the Trump administration’s pro-growth, reflationary policies. The past few weeks have been packed with market-moving events, but the calendar is expected to settle down as we approach year-end.

Treasury Yields Rise Following the Fed’s September Rate Cut
Treasury Yields Rise Following the Fed’s September Rate Cut

Stocks finished October lower as investors navigated Q3 earnings, the upcoming election, and uncertain Federal Reserve policy. Treasury yields climbed as investors considered the possibility that the Fed may not cut interest rates as much as previously expected. Concerns about fiscal spending also drove Treasury yields higher, with expectations for continued high government spending regardless of the election outcome.

The Next Two Weeks are Filled With Market-Moving Events
The Next Two Weeks are Filled With Market-Moving Events

This week, stocks traded lower after several weeks of consistent gains. The S&P 500 dropped -0.5%, underperforming the Nasdaq 100's +0.3% gain but outperforming the Russell 2000's -2.8% return. The Magnificent 7 rose over +2%, making Growth the only factor to trade higher. The next two weeks are filled with market-moving events, and once they pass, stocks could rally into year-end.

Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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