March 1, 2016
It takes the earth just over 365 days to complete a single revolution around the sun. The extra six hours or so our planet requires to complete its actual orbit is just an oddity we ignore until we’re forced to do something about it. So, every four years we cram an extra day into the calendar as a human acknowledgment that our system is less than perfect. And since February, at 28 days long is the neediest month, it’s the beneficiary of what we refer to as Leap Day.
An extra day this year provided the stock market with an extra trading session and the opportunity to add some clarity to the end of a rollercoaster month. Instead, February 29 gave us more of the same; an up-and-down performance without much conviction that left investors without a clear sense of what’s next.
We saw a wide disparity in performance among equity categories as the best sector outperformed the worst by more than 10%. The best performers were Materials (+7.60%) and Industrials (+3.99%). Financials (-2.94%) were among the biggest losers for a second straight month following an 8.9% loss in January. Energy (-1.88%) also lagged and continues to feel the pain of volatility in oil prices.
|Index||February 2016||YTD 2016|
There was cautious optimism at the start of February following a 7-day run that saw equities rise 7% from their Jan. 20 lows, but those positive vibes faded quickly. The S&P 500 fell in seven of the month’s first nine trading days, culminating with a thud on Feb. 11. At that point, the benchmark index had lost more than 11% of its value in only six weeks dating back to Dec. 31.
Crude oil prices continued to drive the day-to-day movements of equities. In eight of those first nine trading days in February, oil closed lower. On Feb. 11, West Texas Intermediate Crude declined to $26.05/barrel, its lowest point since May 2003. Oil rebounded to nearly $34/barrel by the end of February, sparking a recovery in equities that left the S&P and the Dow relatively flat for the month. The surge in oil prices was the result of a potential production freeze agreed to by Russia and Saudi Arabia. That agreement is contingent upon the consent of additional OPEC nations and has yet to be formalized.
There were 20 trading days in the month of February. On all but five days, the S&P 500 and oil moved in the same direction. The strong correlation between oil and equity prices is unusual, historically speaking. Typically, lower oil prices tend to be perceived as beneficial for the overall economy. Since the US is a net importer of oil (we consume more oil than we produce), declining crude means Americans can access more energy at cheaper prices. Consumer spending – the largest component of GDP – also gets a boost from less expensive gasoline.
In the short-term, however, volatile oil prices have been viewed as a proxy for concern over the health of the global economy. That perspective will not last forever, and while our Marks Group equity portfolios remain underweight energy, the economic advantages of cheap oil (and cheaper commodities in general) will ultimately be reflected in stock prices.
As fears of a global recession climbed higher in early February, so did the demand for safe-haven assets. Yields on the 10-year US Treasury bond fell to 1.57%, their lowest level since December 2012. By month’s end, those yields had normalized somewhat to 1.74%, still significantly lower than Treasury yields from a month earlier (1.93%).
Currency values also exhibited considerable volatility. On Feb. 3, the US dollar weakened its most in 7 years versus a basket of major currencies. In one sense, that weakening demonstrated a growing concern about the US economy. Like cheaper oil, however, a weaker US dollar will ultimately benefit many US companies that generate significant revenues in other countries.
Fortunately, equities rallied in the second half of February helped by revised GDP numbers showing US economic growth wasn’t as bad as initially feared. For 4Q2015, the latest figures reflected growth of 1% annualized. Separately, consumer spending in January increased the most in eight months fueled by low unemployment, cheap gas prices, and steadily rising home values.
From its Feb. 11 low, the S&P 500 gained nearly 7% and finished the month just below where it began. The Dow Jones Industrial Average managed a minimal monthly gain.
Investors and equity prices remain particularly sensitive to any action or inaction by central banks, and the looming decisions by those entities will surely impact where stock prices go from here. The European Central Bank is expected to announce additional stimulus measures on March 10. Five days later on March 15, the Bank of Japan will clarify the next steps in its monetary policy. The Federal Reserve and Chairwoman Janet Yellen wrap up their next meeting on March 16.
In February, Yellen suggested the Fed was unlikely to seriously consider cutting interest rates (in effect, undoing the Fed’s rate hike in December), but consensus estimates call for no further rate hikes in the coming six months as a result of global economic conditions that have worsened since late 2015.