Equities go even higher in February

Mike Loewengart, Vice President of Investment Strategy

E*TRADE Capital Management

03/02/17

Equity markets surged again in February amid optimism about the economy and muted concerns around political uncertainty. While some market observers view U.S. stocks as expensive, many have not been deterred. International equities lagged in February, but emerging markets are ahead of the U.S. for the year.

Bond prices increased, lowering the yield on the benchmark 10-year Treasury note, a change from a few months ago when investors were selling bonds following the election.

Minutes from the Federal Reserve’s January 31–February 1 meeting indicated Fed officials discussed the timing of an interest rate hike. “Many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than current expectations,” the minutes said on February 22.

On February 28, San Francisco Fed President John Williams said in a speech that an interest rate hike “is on the table for serious consideration” at the March meeting.

Through February, market consensus leaned toward the Fed holding steady in March and raising rates in June.


Domestic equities

The S&P 500®’s 3.97% gain in February was its best monthly result since March 2016’s 6.60% increase. The Dow Jones Industrial Average was up 5.2%, highlighted by a 12-day streak of record-closing highs that ended on the last trading day of the month.

Graph of equity performance

Source: Morningstar Direct

Health care was the big winner in February, continuing its improvement since dipping in the aftermath of the election, and amid talk of Affordable Care Act adjustments. Utilities surged in February, with their dividends making them an attractive choice.

Energy and telecom were the only sectors that fell in February. Both are down year to date as well.

Graph of the best and worst performers Feb 2017

Source: Morningstar Direct

For the year, technology stocks are the biggest gainers, continuing to perform on renewed interest in traditional hardware like personal computers.
Year to Date best and worst performers

Source: Morningstar Direct


International equities

International stocks continued to perform in February, driven by emerging market equities. The MSCI Emerging Markets Index increased again in February and is up a robust 9.8% year to date.

Graph of how international equities performed in Feb 2017

Source: Morningstar Direct

Latin America’s exporting nations were a leader in emerging markets, and Brazil in particular, which continues to come out of a two-year recession. China benefitted as the Trump administration scaled back its comments about currency manipulation. 

 

Graph of Feb 2017 emerging market performance by region

Source: Morningstar Direct


Fixed income

Treasury yields fell across maturities in February. Notably, the yield on the 10-year Treasury note recorded its largest decline since last June, dropping 9 basis points or .09% to 2.35% (a basis point is one one-hundredth of a percent). 

Graph of how domestic bonds performed in Feb 2017

Source: Morningstar Direct


Investment-grade corporates were one of the month’s biggest winners, along with high-yield and long-term Treasuries. High interest rate-sensitive, long-term Treasuries gained in a falling rate environment. Falling rates and the stronger equity market propelled corporates. The shortest Treasuries were the weakest performers, but still positive.
February 2017 best and worst fixed income sectors
Year-to-date best and worst fixed income sectors 2017

Source: Morningstar Direct


The bottom line

Equities rose again in February, the Fed sent strong rate hike signals, and the Trump administration continued to put its stamp on Washington. 

Heading into March, investors may want to note some potential sources of volatility, including:

  • High U.S. equity valuations—Some market observers believe future returns may be muted given the length of the bull market, which dates to March 2009. Stocks have jumped higher and experienced few meaningful corrections. While earnings have risen, they have not kept up with the increase in prices.
  • Fed-speak about rate hikes—Fed officials ended February by suggesting the chances of a rate hike at the March 14–15 meeting have increased. Upcoming labor market and inflation data releases prior to the meeting will likely inform the Fed’s decision.
  • President Trump’s policy proposals—The president reiterated his pro-growth proposals in his speech to Congress, but provided few details. It remains to be seen how patient investors may be in waiting for specifics about how the administration plans to implement economic proposals.

A well-diversified, risk-appropriate portfolio, rebalanced periodically can help investors navigate uncertainty and volatility, while working toward long-term financial goals. Possible diversification strategies could include:

  • Going abroad—Developed and emerging market equities may offer more attractive valuation profiles than their U.S. counterparts.
  • Sticking with fixed income—Bonds are not dead yet, despite rates being significantly higher than they were last summer and the potential for a hike. A measured fixed income allocation is a standard component to any well-diversified portfolio.
  • Picking up TIPS—Inflation has been picking up and may continue to increase as the Trump administration’s policies start to take shape. Treasury inflation-protected securities (TIPS) are one way to combat inflation. TIPS’ principal values are indexed to inflation through adjustments to their principal value twice per year.

 

As always, thank you for reading.

Mike Loewengart

Vice President, Investment Strategy

E*TRADE Capital Management, LLC

 

Additional contributor:

Andrew Cohen, CFA

Director, Investment Strategy

E*TRADE Capital Management, LLC

 

Mike Loewengart is the Vice President of Investment Strategy for E*TRADE Capital Management, LLC. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Mike started his career as a research analyst and an investment manager due diligence analyst for the consulting divisions of several high-profile investment firms. He is a graduate of Middlebury College with a degree in economics.

Andrew Cohen is a Director of Investment Strategy for E*TRADE Capital Management, LLC. Prior to joining E*TRADE, Andrew was the Director of Investments and Operations for a large Registered Investment Advisor, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a CFA charterholder and a member of both the New York Society of Security Analysts and CFA Institute. He is a graduate of Virginia Tech with a B.S. in Finance.