Clearview Portfolio Consulting February Market Recap
Key Points:
• Volatility increased in February from unrest in the Middle East and worries in the private credit markets.
• Value stocks held up well amidst the volatility in the growthier technology sector.
• High quality bonds outperformed stocks for the month.
Volatility returned to the markets in February as the euphoria of Artificial Intelligence (AI) benefits shifted towards the threat of its impact on the labor market. Stocks of software companies were hit particularly hard as fears that AI may replace or at least disrupt their businesses. These concerns hit private credit markets as fears of write-downs and risk of defaults caused one manager to stop quarterly redemptions for its private debt offering. Fears of illiquidity in these funds tend to spread and cause concerns in other private debt funds, which tend to lead to further selling.
The S&P500 fell 0.76%, marking its first negative monthly return in 9 months. The tech-heavy NASDAQ fell 3.33% while the Dow Jones Industrial Average gained 0.31%. Investors continued to rotate into value stocks with defensive sectors leading the way. Utilities gained 10.35% while consumer staples rose 7.94%. Consumer discretionary (-5.38%), communication services (-5.14%) and technology (-3.91%) were the hardest hit parts of the market. Small cap stocks continue to outperform large cap names to start the year.
Middle East tensions ramped up over the last few weeks with Iran and the US failing to come to terms. The US and Israel struck Iran which closed the Strait of Hormuz, where over 20% of the world’s oil and gas passes through. Fears of higher energy prices could slow down the global economy and cause inflation to move higher. Through the end of February, international markets performed well with the MSCI EAFE Index (developed markets in Europe, Australia and Asia) gaining 4.63% while the MSCI Emerging Markets Index advanced 5.5%. The longer the conflict with Iran lasts the more uncertainty and pressure there will be on global equities. The risk-off trade usually leads to a stronger US Dollar and higher Treasury Bond demand (lower yields).
The bond market had a strong February with the Bloomberg US Aggregate Bond index gaining 1.64%. Long dated Treasuries rallied as investors moved up in quality given the conflict in the Middle East and issues in private credit. High yield bonds were the worst performing bond sector, further illustrating a risk-off investor sentiment.
Sources: Morningstar Direct, Wall Street Journal, JPMorgan, First Trust