Most economic indications from February continued to show strength, allowing financial market participants confidence to push prices higher. Among the data were February’s ISM Manufacturing Index, which improved to 56.6 from January’s 54.0, indicating continued optimism and expansion by the manufacturing sector. Employment numbers remained strong with low unemployment (4.0% in February, up slightly from January’s 3.9%), and job growth leading more people into the labor market. Despite the resulting strain on the supply and demand relationship for labor, wage inflation has yet to rear its ugly head, with average hourly earnings declining or remaining steady in February. Also boosting investor confidence was the Fed, which clarified that its future policy decisions would be largely data dependent, outlining a more predictable and quantifiable decision process. Finally, a federal budget agreement was reached and, although likely to spur some legal debate, it will avoid the financial strain of an additional government shutdown. Growth expectations for the U.S. economy continue to be in the 2.5% range, indicating moderate growth without excessive inflationary pressure. Foreign influences on market sentiment remain largely the same with the primary concern being uncertainty over the outcome of trade negotiations with China. Additionally, but to a lesser extent, financial markets continue to focus on the Brexit outcome and diplomatic negotiations with North Korea.
January’s strong returns carried over to February with all major indices posting positive results. Equity markets were buoyed by solid economic news and a more passive, data driven Fed. Corporate earnings reports remained generally positive, adding credibility to market levels. Some volatility was felt as inflationary fears joined trade negotiations with China as market concerns, however optimism regarding both prevailed, allowing stock prices to edge higher. Small companies, as represented by the Russell 2000, led the charge again by adding 5.2% last month. These monthly results augmented January’s strength, leading YTD returns for all domestic equity benchmarks breached double digits. Foreign markets lagged the domestic results but still showed strength with YTD numbers above 9%.
Treasury yields changed little in February, resulting in benign returns for most bond indices. Most movement occurred beyond two years, with yields rising slightly, hampering the performance of longer bond benchmarks. This also caused any yield curve inversion evident in January to become less significant. With the Fed temporarily on the sidelines, bond investors chose to focus on credit sectors, whose spreads continued to tighten with the strong equity market. The high yield sector remained strong with returns of 1.69% for the month, bringing that sector’s YTD returns to an equity-like 6.36%. Bond prices contain some probability of a Fed tightening before the end of 2019. Investors will focus on economic data, like the Fed, for any indication of future policy shift.