What a difference a month makes. The new year started off on a bullish note with both the equity and bond markets rallying in the month of January. Strength was evident across all areas of the markets with growth and small-cap stocks and high yield bonds leading the way. But market sentiment took a decidedly different turn once February rolled around, reminding us just how quickly things can change.
The Fed started the month off with an expected interest rate hike and reiterated its stance of ongoing hikes to combat persistent inflation. This was followed by a stunningly strong January jobs report that blew past estimates. While the report alleviated fears of a recession, it only stoked concerns that the Fed will continue to raise rates.
Further releases of economic data throughout February only added to those concerns. By the end of the month, the broad areas of the markets all showed declines in February with the Dow completely erasing its January gain and the U.S. Bond Aggregate nearly reversing its gain as shown in the table below.
Growth and small-cap stocks, though weak in February, still managed to hold up better than other areas of the markets. This is a noticeable shift from last year when growth and small caps were among the worst performers. Conversely, commodities, which had a stellar performance in the first half of last year, have continued their decline into this year. As we often see when markets pivot, the areas that have experienced the greatest weakness tend to be the ones that lead, while the former leaders are the ones now lagging behind.
Clients who have been with us over the years and through various market cycles have come to expect FSA to raise cash when volatility picks up and positions breach their FSA Safety Nets®. Equities are normally the asset class to bear the brunt of our trading during turbulent times. But, broadly speaking, the portfolios had some equity exposure that held up relatively well, such as small caps. Surprisingly, the bulk of our selling in February came from the fixed income side of the portfolios, as the January rally in the broad bond market quickly faded. We exited high yield corporate bonds, or in some cases, we added an inverse high yield bond position. However, some areas of the bond market have performed well, such as floating rate bonds and short-term bonds which we hold in our Income and Income & Growth strategies.
The table below shows how the various strategies were positioned as of the end of February:
The cash levels are currently elevated as we monitor certain levels in both the stock and bond markets. Since May of last year, the S&P 500 has been trading in a range from around 3600 to 4300. We have previously discussed the dubious pattern of the equity market making lower lows and lower highs. While the S&P did manage to break to the upside in January above its previous year-end peak, the fact that it promptly rolled over again in February tells us that we remain in a volatile environment which requires a prudent deployment of cash.
We will continue to monitor the direction the markets take, and we will react accordingly. Even choppy markets can present pockets of opportunities, and we remain vigilant to find them.
With spring comes tax season, and we encourage you to reach out to your advisor for assistance with tax planning related to your portfolios.
Mary Ann Drucker
Assistant Portfolio Manager
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