The Market Navigates Economic and Policy Uncertainty in February
Photo Credit: Eric Koning, Unsplash
Monthly Market Summary
The S&P 500 Index returned -1.3%, outperforming the Russell 2000 Index’s -5.2% return. Six of the eleven S&P 500 sectors traded higher, led by defensive sectors.
Bonds traded higher, with the U.S. Bond Aggregate delivering a +2.2% total return. As Treasury yields declined, corporate investment-grade bonds produced a +2.4% total return, outperforming corporate high-yield’s +1.0% total return.
International stocks traded higher and outperformed the S&P 500. Developed Markets gained +3.0%, led by Europe, while Emerging Markets returned +1.1%.
Stocks and Bonds Move in Opposite Directions Amid Market Rotation
Stocks traded lower in a late-month sell-off as sentiment weakened. The S&P 500’s decline erased most of its post-election gains, which expectations for stronger growth and deregulation under the new administration had driven. Smaller companies underperformed, with the Russell 2000 ending the month more than -10% below its late November peak. Beneath the surface, the January market rotation continued as last year’s outperformers lagged. The Magnificent 7, a group of mega-cap tech stocks that drove most of 2024’s gains, fell by -8% and dragged down the Nasdaq 100, the Large Cap Growth factor, and the S&P 500.
In contrast, defensive sectors and international stocks traded higher, while gold set a new all-time high. In the bond market, Treasury yields declined, with the 10-year yield falling to its lowest level since early December. The decline in interest rates caused bonds to rise, partially offsetting the stock market sell-off.
Economic Growth Holds Steady, but Market Reacts to High Expectations
The sell-off was not triggered by a single event or data point but by a combination of interconnected factors. Economic reports underperformed expectations and revealed a cooling U.S. economy as the services sector contracted and consumer confidence deteriorated. The combination signaled slowing consumer demand, a key pillar of economic growth during recent years. Policy uncertainty remained high in Washington, with renewed tariff threats against key trading partners and DOGE spending cuts—the market’s primary concern: imposing tariffs and reducing government spending could slow economic growth. In the stock market, Nvidia’s highly anticipated earnings report failed to reignite enthusiasm for AI companies, leading to a broader sell-off in technology stocks.
Market Sentiment Shifts from Growth to Caution in February
The market initially focused on the incoming administration’s pro-growth policies after the election. Expectations for tax cuts, deregulation, and increased energy production fueled hopes for more substantial US economic growth. At the start of the year, investors were optimistic about a “Goldilocks” scenario—moderate growth, cooling inflation, and lower interest rates. The optimism propelled stocks to new record highs this year, but investor sentiment has become more cautious with economic and policy uncertainty building. The focus has now shifted from solid earnings growth and a robust labor market to concerns about slowing economic growth and uncertain government policy.
US Sector Returns (January in %)
US Sector Returns (YTD in %)
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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