Monthly Market Report: February 2023

Tightening Monetary Policy Halts Market Rally

Prepared by Brandon Yee, CFA, CAIA, and Thomas Connelly, CFA, CFP

Developed Markets Decline

In the month of February, international developed stock markets returned -2.33%. The UK and Europe ex UK recorded returns of 0.25% and -0.88%, respectively. Canada and Pacific ex Japan lagged other markets. International developed markets are up 5.67% YTD while the U.S. market is up 3.95%. Investor expectations of further interest rate hikes and tightening monetary policy contributed to the market declines this month.

Emerging Markets Pull Back

Broader emerging markets posted a -6.17% return for the month. Mexico and India recorded returns of -0.20% and -4.57%, respectively. China and Brazil lagged other markets in February. China’s abrupt reversal of its zero-Covid policy has brightened the country’s economic outlook, but increasing geopolitical risks negatively impacted Chinese equities.

Information Technology and Industrials Outperform

Information technology and industrials recorded returns of -0.49% and -1.05%, respectively, in February. Materials and energy lagged other sectors this month. The information technology sector has rebounded this year after its steep 2022 decline. Much of the rally in this sector has been due to retail investors buying these stocks as opposed to institutional investors. Further tightening of monetary policy by central banks could create a tough environment for the information technology sector.

Small-Cap Stocks Hold Up in February

In February, value underperformed growth in the large-cap space and small-cap space. Momentum recorded a return of -0.81%. Small-cap value and small-cap growth stocks are up 7.02% and 8.76%, respectively. Value stocks across the world continue to trade at large discounts relative to growth stocks. Value-oriented sectors such as energy, financials, and materials may still have much more room to run.

Value Stocks Holding Steady in the International Markets

In the international developed markets, value outperformed growth in the large-cap space and small-cap space for the month. Momentum recorded a return of -1.72% while small-cap emerging market stocks posted a return of -6.17%. Valuations of value stocks are still very low relative to growth stocks in both international developed and emerging markets, which is consistent with the US market. Rising interest rates may also pose more of a risk to growth stocks than value stocks.

Short-Term Interest Rates Continue to Rise

In February, the three-month Treasury bill index returned 0.33%. From the beginning of 2022 through the end of February 2023, the annualized interest rate on the 90-day Treasury bill increased from 0.08% to 4.93%. Savers are now getting paid much more in interest. However, they still face low real interest rates due to inflation remaining high. The CPI has increased by 6.35% over the past year through the end of January.

Fixed Income Investments Fall

The returns of deflationary hedges were mostly negative for the month. The Bloomberg Barclays U.S. Agg Bond Index returned -2.59% for the month. In February, interest rates increased, which caused the decline in the fixed income markets. Leveraged loans and catastrophe bonds were up in the month. Even though some of the riskier fixed income investments like high yield have rebounded, these less creditworthy borrowers may face difficulties meeting their financial obligations as they continue to roll their debt and pay higher interest rates.

Inflation-Sensitive Investments Decline

Inflation-sensitive investment returns were negative for the month. U.S. real estate and the Alerian MLP returned -4.93% and -1.19%, respectively, in February. The Bloomberg Commodity index posted a return of -4.70%. Gold bullion is up 0.60% YTD. Oil markets continue to be tight, and consumers may face spikes in oil prices if demand picks up and supply remains constrained.

U.S. Dollar Mixed Versus Other Currencies

Over the past three months, the U.S. dollar depreciated against the Euro, Japanese Yen, and Swiss Franc. Over the past year, the U.S. dollar strengthened against most currencies except for the Mexican Peso. The continuation of U.S. fiscal deficits may weigh on the U.S. dollar in the medium-term to long-term. Gross federal debt to GDP stands at 121% and is forecasted to increase through the decade.

Brandon Yee, CFA, CAIA – Senior Research Analyst

Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.


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