After a great market run in January that exceeded expectations, the markets had a pull-back during the month of February. The shortest month of the year brought back some market volatility and uncertainty. Below is a breakdown of market performance and some of the key drivers of the volatility last month.
February 2023 Performance:
The biggest drivers in February’s general market pullback stemmed from incoming data that spooked investors as to what the US Federal Reserve and Jerome Powell are going to do next. The first point is the fact that employment in the US remains much more resilient than what economists would have thought given the rise in interest rates. Data came in showing that unemployment inched lower in the US to 3.4%. This is the lowest level since 1969.
That data point indicates to the market that there is a chance the Fed will raise interest rates higher than previously anticipated. The Fed wants to raise rates and see unemployment rise in order to curb personal spending, which would result in a lower inflation number.
The second driver in February’s general pullback was the increase in bond yields. When the market began to fear further interest rate hikes, it also once again stoked fears of a future recession. When the market fears both higher rates and future recessions, short-term bond yields will go up. This results in current bond returns decreasing, along with having a negative effect on individual companies’ share price.
With all that being said, February wasn’t bad news everywhere you looked. Over the course of the month, the mainland China index CSI300 index outperformed the S&P500 and NASDAQ in the US. Also, the FTSE100 (the UK’s primary index) was up 1.3% for the month. With attractive valuations and potential long-term upside, international markets are looking more attractive every month.
Always remember, diversification is key, and even during months where the markets struggled, there are almost always some bright points cutting through the dark.
