Historically February is second only to September to win the banner for worst month of the year for stocks. It was the roughest month since September for the stock and bond markets. The Dow lost over 4% in the month of February and the S&P 500 came in second among the major indexes approaching a 3% loss. It was hard to sit through after the encouraging gains over the prior four months, but declining stock market performance in February 2023 was no surprise.
The bond market is traditionally a hedge against stock market declines. Investors are encouraged to diversify their portfolios with bonds to soften any downturn in stocks. That did not work in 2022 as all asset classes moved together. The bond market suffered as much as the stock market in 2022 and that trend is continuing in 2023. The hawkish policies of the Federal Reserve are holding up bond yields while bond prices continue to fall. The most recent comments from the Fed target short term rates of 5% to 5.25% in 2023 with an expectation that rates will remain high well into 2024.
In February, economic numbers were strong. GDP rose 2.7% in the fourth quarter making it the second consecutive quarter of growth after two negative quarters. There is evidence that inflation is slowing, but it is not happening as quickly as hoped. It is counterintuitive, but strong economic growth is believed to be the catalyst for stock market losses in February. Investors are concerned that interest rates will continue to rise.
The S&P 500 index has been volatile due to the heavy allocation to mega-cap growth stocks. Since May of 2022 this index has traded on either side of 4,000 points. For nearly ten months the index has traded between 4,200 and 3,500 points. That range became tighter in the last three months with the lower end being closer to 3,800 points. Trading in a range like this is normal market activity as stocks recover from the bear market. The index closed the month of February at 3,970. We want to see the S&P 500 index move past 4,000 and successfully get through 4,200. There is significant overhead resistance at 4,100 to 4,200 level, and it can take time to resolve that and move higher. At the current activity level, if it were to decline below 3,800 points that is reason for a more defensive posture.
The Value Line Geometric Index is a chart we often reference because it is equal-weighted. It removes the impact of the mega growth companies. This chart shows how the average stock is performing. In February the chart shows a healthy consolidation of the gains of the prior few months. Based on this chart, the average stock looks stronger than the S&P 500 index. That confirms continued breadth in the market which is positive.
Expectations can change with any number of variables and if it does, our strategy will adjust. We are committed to our discipline of setting protective stops on all holdings. These stop prices move up behind the stock when it increases in price, but if it should decline, the stop is there to prevent a large loss.
If you have questions about your own account, please let us know. We will be happy to call or meet or Zoom to review it.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.