Domestic equity markets continued their move higher in February, reaching new record levels almost daily, as investors embraced the potential growth from the new Presidential administration, positive economic data, and strong corporate earnings. President Trump’s proposed policies remained in focus, with investors anticipating further details on plans for tax reform, repealing and reforming Obamacare, and international trade, among other initiatives. Growth in the fourth quarter for S&P 500 members, with the majority of companies having reported by the end of February, has shown a roughly +5% increase in revenue and a +7.4% increase in total earnings. Odds of a FOMC rate hike at the March 14-15 meeting increased steadily throughout the month, with some analysts giving it a probability of more than 50% or greater, as market sentiment has continued to improve. The second estimate of fourth-quarter GDP was reported at +1.9%, with consumer spending (the largest part of the economy), rising 3%. The Conference Board’s Consumer Confidence Index rose to 114.8 in February, a fifteen-year high.
Within this context, domestic equities were mostly higher during the month. The S&P 500 gained +4%, pushing its YTD return to 5.9%, whereas larger gains were seen on the Dow Jones Industrial Average (DJIA), which advanced 5.2%. The tech-heavy NASDAQ Composite Index rose by +3.9%, and is now up 8.4% YTD. The Russell 2000 Index of small cap stocks returned 1.9%, underperforming the Russell 1000 Index of large cap stocks, which returned +3.9%. Growth stocks outperformed value stocks, with 60bps of difference between the Russell 3000 Growth’s return of +4.02% and the Russell 3000 Value’s return of 3.42%. In terms of sector performance, the top performers were Healthcare, Utilities, Financials, and Technology, with returns of +6.4%, +5.3 %, +5.2%, and 5.1%, respectively. Energy and Telecommunication Services continued to struggle, posting their second consecutive month of negative returns this year, losing 2.2% and -0.4%, respectively. Commodity prices rose slightly by 0.14%. REITs bounced back with a gain of 3.5%, following negative performance in January.
International equity markets trailed their domestic peers in February, cooling off slightly after a strong January. The MSCI World ex-U.S. Index increased by +1.6% for the month, and is now up 5.2% YTD. European Purchasing Managers’ Index (PMI) readings continued to show growth in February, hitting a six-year high, driven by strength in France and Germany. Emerging markets posted stronger results than international developed, with a gain of 3.1% for the MSCI Emerging Markets Index, which is now up 8.7% YTD. The MSCI EAFE Index, which measures developed markets performance, gained +1.4%. Regionally, EM Asia, EM Latin America, and China were the best relative performers, with returns of +3.64%, +3.57%, and 3.54%, respectively. EM Eastern Europe was the poorest relative performer, losing -3.6%, whereas Japan and developed Europe provided gains that were slightly above 1%.
Fixed-income markets mostly posted gains during the month, with the yield on the 10-Year Treasury Note trading within a fairly tight range. The yield curve flattened in February, as intermediate- and long-term yields declined slightly from their January levels, while short-term yields moved higher. Within this environment, the yield on the 10-year U.S. Treasury Note ended the month at 2.36%, down 9 basis points from the 2.45% level at the end of January. Broad-based fixed income posted gains, with the Barclays U.S. Aggregate Bond Index increasing 0.67%. Global fixed income markets performed slightly worse, as the Barclays Global Aggregate ex-U.S. Index gained +0.3%. The Barclays U.S. Corporate High Yield Index increased by +1.46%, and is now up +2.9% YTD. Municipals posted a gain of +0.7%.