After having the best month in stocks since 2020 in January, which triggered a “golden cross” on the S&P500 on February 2nd, the rest of February saw a broad-based decline across equity and bond markets. The market’s pullback started pre-open on Friday, February 3rd, with a BLS jobs report far better than any economic bull could have imagined. Based on market seasonals, it shouldn’t come as a big surprise that equities struggled in February after a strong January.
After having the best month in stocks since 2020 in January, which triggered a “golden cross” on the S&P500 on February 2nd, the rest of February saw a broad-based decline across equity and bond markets. The market’s pullback started pre-open on Friday, February 3rd with a BLS jobs report far better than any economic bull could have imagined. Based on market seasonals, it shouldn’t come as a big surprise that equities struggled in February after a strong January.
I’m Chris Perras, Chief Investment Officer with Oak Harvest Financial Group, and this is our investment team’s mid-week release titled “News or Noise?”. This week, we are doing a little February recap, and titling it “February made me shiver”.
Going into early February, our investment team messaged that seasonally speaking, we were entering what has historically been a short-term rough patch. Statistically speaking, February has been the second worst month for stock returns with only September’s average return being worse. Dating back to 1929, February has been positive only about 53% of the time and the average return for the month is marginally negative. Only September has the worst track record for monthly returns with a negative return profile nearing -1.2% and positive returns less than 45% of the time.
As one might have expected, the greater-than-normal rally in the markets in January gave way to a larger-than-seasonally-normal decline in February. The S&P500 was up almost +6.2% in January and declined about -2.6% in price in February. The only positive returning groups for February remained 2022 laggards, consumer discretionary, technology, and industrial stocks. The worst groups in February, energy, utilities, and healthcare, were the worst-performing groups in January and the best-performing groups in 2022.
What can we point to as the catalyst for the February pullback in stocks and rise in shorter-term treasury yields? That’s pretty easy after the fact. A still strong US consumer spending post-Christmas and a strong labor market for services gave rise to an uptick in inflation expectations. This caused nominal interest rates to rise causing a stronger US dollar. As discussed throughout much of 2022, a stronger dollar is a headwind to revenue and earnings growth for many large cap USA based multinational stocks that a heavy weights in the S&P500. This dynamic hit at the same time that manufacturing data like the Philly Fed Index, Chicago PMI and other regional manufacturing data points are pointing to contractions.
The good news is that February stock declines combined with interest rates rising has now extended itself both in price and time to levels that should be once again supportive of forward returns in the coming months. Viewers recall that March through July tend to be stronger returning months for stocks, particularly in the 3rd year of a Presidential cycle like 2023 is. Here’s the historic data provided by Merrill Lynch.
Looking at the last 70+ years, stocks have had a positive one year return a year after midterm election every single cycle, averaging almost +15% over the next 12 months. Of course there are no guarantees in the stock markets and every cycle is different, but those are pretty good odds in my book.
If February in the stock and bond markets made you shiver? Get on the phone and give our team of financial advisors and planners a call. We will sit down with you and help you and your family do the math to figure out how you might best meet your retirement goals. Our team specializes in tailoring broad investment portfolios to meet your needs and maybe a few of your greed’s in retirement?