Equity markets faltered in the first half of February before amassing some positive momentum in the later half of the month, buoyed by an increase in oil and an unexpected positive revision to fourth-quarter GDP growth. The S&P 500 Index continues to exhibit a high degree of correlation with crude oil, and both hit a bottom for the month on February 11th. West Texas Intermediate Crude Oil declined to a low of $26.05/barrel, a level not seen since May 2003, before rallying to almost $34 per barrel by the end of the month amidst hopes that a producer meeting in March will lead to a production freeze. The Commerce Department now believes GDP grew at a 1% rate versus the 0.7% originally reported, due primarily to a higher level of inventory accumulation than initially thought. Consumer spending rose 0.5% from December to January, the biggest monthly gain since May, with consumers taking advantage of cheap gas prices and low unemployment. The housing market remains resilient, with existing home prices and sales both rising. Nevertheless, new home sales did take a 9.2% hit, coming in well below the consensus forecast. Industrial production rose in January for the first time since July, though the service sector grew at its slowest pace in two years. The Federal Reserve will meet again in mid-March. No rate action is expected given worsening global economic conditions since the rate hike in December.
Equity markets exhibited a high degree of volatility in February, with the S&P 500 falling in 7 of the first 9 trading days, and bottoming on the 11th, down 11% from its year-end close. Equities subsequently rallied in the second half of February, with the Dow & S&P ending relatively flat for the month (up 0.75% and down 0.13%, respectively) and the NASDAQ down 1.03%. Sector performance was disparate, with the best performing sector (Materials) outpacing the worst performing sector (Financials) by almost 10%. Markets will likely focus on central bank policy in the month ahead. The European Central Bank is expected to provide more stimulus and the Federal Reserve is expected to hold rates steady. Complicating the global rate environment is the lack of visibility from the Bank of Japan and the Chinese Central Bank.
Investors continued to seek safety in early February as fears of a global recession increased. The yield on the 10-year Treasury fell to 1.57%, the lowest level in over three years, before increasing to 1.74% by month-end. Both high-yield and investment-grade corporate bond spreads tightened in February despite rating agency predictions of increased highyield default rates. Forecasted default rates for the Metals and Mining and Oil and Gas industries continue to be significantly higher than in other sectors. Overall, fixed-income yields remain paltry and we caution investors against extending portfolio duration in an attempt to capture additional yield. Nevertheless, low rates are likely to persist over the next several quarters as European and Japanese central banks grapple with the efficacy of negative interest rate policies.