February Market Insights

Stocks rallied in February, with portfolios that have exposure to both U.S. and international stocks benefitting.

U.S. large-cap stocks (S&P 500) gained 5.34% while small caps (S&P 600) rose 3.32%. Emerging-market stocks (MSCI Emerging Markets) increased 4.76% and developed-market international stocks (MSCI EAFE) rose 1.83%. The Bloomberg U.S. Aggregate Bond Index, a broad measure of bonds, fell 1.41%.*

WHY IT HAPPENED

Interest rates and inflation remain the market’s overarching focus, but its attention was diverted in February by strong profits from technology companies. For instance, optimism about the prospects of Nvidia, which makes AI-related technology, fueled a robust rally, particularly in large-cap stocks.

The market’s gains were made against a cloudier inflation and interest-rate picture. Data in previous months had been showing core inflation on a fairly steady downtrend toward the Federal Reserve’s target of 2%. This raised expectations that the Fed could loosen its grip on interest rates and embark on a number of rate cuts this year. However, the most recent reports showed upticks in the month-to-month (though not annual) inflation rate.
 
Moreover, data continued to show resilient economic growth amid higher rates, with solid reports on the labor market and the Gross Domestic Product during the month. While these reports diminished expectations for the number of rate cuts, they still left rate cuts in 2024 on the table for the market, albeit fewer than people were expecting late last year.

What it means for you

The market is always parsing the outlooks for the economy, corporate profits and interest rates, so there are a lot of factors at play. Any one of them showing weakness or strength could create market volatility. But remember that the market always fluctuates, and that monthly economic data is noisy.

It is not uncommon for a major stock or bond index to have negative returns year to date only to reverse course and end the year positive. There are periods when different asset classes – small-cap or international stocks, for example - do better and worse than large-caps, the leader so far this year.  It’s very hard to predict what asset class will do best. That’s why diversification matters so much.

However, whether monthly market trends continue is less important to a retirement portfolio, which likely has a multiyear horizon. Although past performance is not a guarantee of future results historically, a longer time horizon (extending not just to, but also through retirement) can give you more opportunity for growth since the market has had an upward bias over longer periods of time, even though there have been and likely will be declines along the way.

If you ever have questions about your portfolio, we encourage you to contact your financial planner.

* Index return data provided reflects “total return,” which includes income generated by securities held within the index, such as dividends and interest. Because it includes income, index total returns can differ from index price returns that only consider prices.

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