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Markets in February 2023 Thumbnail

Markets in February 2023

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Investment Insights


  • Markets took a breather in February as inflation remained sticky and some resilient economic data pushed bond yields higher. The S&P 500 was down 2.4% in February. However, the Growth trade has continued to outperform this year with Technology stocks being the only sector to post a gain in February. This is despite Q4 earnings down 4.6% year over year and companies providing weak forward guidance.
  • U.S. payrolls jumped by 517k in January, way above expectations. The unemployment rate fell to 3.4%, the lowest level since 1969. Wage growth was in line with estimates.
  • U.S. retail sales were strong in January advancing 3% month over month.
  • CPI rose 6.4% vs 6.3% expected.
  • PPI rose 0.7% last month vs 0.4% expected. 6% year over year vs 5.4% expected.
  • PCE increased 0.6% month over month, larger than expected. Services inflation especially continues to be sticky.
  • The combination of a strong consumer and sticky inflation has contributed to expectations that the Fed still has more work to do. The Fed raised rates by 25 basis points, which was highly expected. However, the expectations for future rate hikes and the final terminal rate have increased considerably recently, pushing rates higher. The 2 year Treasury hit 5%, while the 10 year Treasury hit 4% in Feb.
  • Although the U.S. consumer has held up well despite the highest inflation in decades, there are signs that this strength is deteriorating. Consumer debt reached a new record high in 2022 and increased the most ever in one quarter during Q4. Payment delinquencies also rose but are still relatively low. The average monthly payment for a new car has soared to $777, nearly doubling from 2019. Also, the largest U.S retailers are suggesting that spending has been shifting from discretionary to necessities and are providing guidance for a weak 2023.
  • Conference Board’s Leading Economic Indicator dropped .3%, the 10th consecutive monthly decrease. Still signaling a recession is likely.
  • Net profit margins have fallen to 11.3% in Q4. The sixth consecutive quarterly decline. Down from a peak of 13% in 2021. Is this indicating that employers will need to increase layoffs to protect margins?
  • European inflation came in stronger than expected up 8.5% in February.

Why It Could Keep Going Higher


  • The primary driver of U.S. economic growth is the U.S consumer and Americans still have excess savings they are able to spend.
  • Employment is still strong and that has always begun to slip before a recession.
  • Inflation continues to decelerate and the Fed may be close to pausing rate hikes.
  • The S&P 500 has fallen to a much more attractive valuation, significantly improving the future return potential.

Biggest Risk

  • Inflation and the Fed’s response to get it under control are still the biggest risks the economy faces currently. Fed policy impacts the economy with a significant lag so it is hard to determine what the future effects will be from the current rate hikes.
  • Most foreign central banks are tightening policy at the same time, which may further amplify a global contraction.
  • Employers may be forced to lay off more of their labor force to maintain margins in a slowing economy.
  • Further Geopolitical tensions.


Economic Data

  • U.S. payrolls increased by 517k in January, way above expectations.
  • The unemployment rate fell to 3.4%, the lowest level since 1969.
  • U.S. retail sales increased 3% month over month in January.
  • CPI rose 6.4% vs 6.3% expected.
  • PPI rose 0.7% last month vs 0.4% expected. 6% year over year vs 5.4% expected.
  • PCE increased 0.6% month over month, larger than expected. Services inflation especially continues to be sticky.
  • ISM Manufacturing PMI increased 0.3 points for the first time in 9 months, yet is still in contraction territory.
  • U.S. New Single Family Homes sales rose 7.2% in January. However, U.S. Existing Homes sales declined for a 12th consecutive month, down 0.7% in January.


What We Are Doing


We have continued to maintain a well-diversified allocation. Our tilts towards defensive sectors such as healthcare, consumer staples, as well as low-duration fixed income which helped outperform in 2022, limited some of the upside so far this year.

However, we believe that the markets are pricing in a possible, but unlikely soft-landing scenario and that we may still see more volatility and weakness ahead. So, we are maintaining our more defensive position for the time being. We reduced some of underweights to both international and emerging markets during the month, as the China reopening has improved their economic outlooks.

We will continue to watch the economic dynamic carefully to take advantage of any opportunities.