- Equity markets remained strong with the Dow, S&P 500 and Russell 2000 exceeding January’s gains.
- Healthcare and Financials were the top sectors in February, advancing 6.2% and 5% respectively.
- Small and micro-cap stocks underperformed.
- Expectations for a March 15 rate hike have grown considerably.
The post-election rally gained momentum in February with all four major indices hitting new highs. The rally got an adrenaline boost on the 9th when the new administration reiterated support for tax reform, and with that the Dow began 12 consecutive sessions of all-time closing highs, the best run the index has seen in 30 years. The Dow Jones Industrials Average added 4.77% in February for its best performance since November. The Nasdaq Composite gained 3.75% for the month, setting ten new records along the way to its biggest gain since July. The S&P 500 rose 3.72% in February, posting its biggest monthly advance since March 2016 with set nine record closes. While the Russell 2000 ended the month with a 1.87% gain, bear in mind it soared 11% in November, far more than the others. Nevertheless we continue to see small-caps underperform in 2017, after leading 2016 with a 19.5% return. The Nasdaq-100 had its best start to the year since 2012 while the Nasdaq Composite, Nasdaq Biotech and Nasdaq Bank Indexes all began March at YTD highs.
There was broad strength amongst the primary GICS sectors during the month of February with six of eleven groups gaining more than 4%. Healthcare and Financials led with returns of 6.2% and 5%. Healthcare added to January’s 2.2% gain, +8.5% YTD ending February, while Financials rebounded from a near flat 0.12% in January. In impressive fashion the Staples, Technology, Utilities, and REIT sectors all gained between 4.2% and 4.9% while discretionary and industrials set record highs through the month. While technology was building on a strong 4.3% gain in January, the other three sectors were rebounding from a near flat month much like the financials. The combination of both cyclicals and defensives performing well reflects the broad participation and healthy rotation of flows in this strong bull market. The laggards for the month were Materials (+0.5%), Telecoms (-0.39%), and Energy (-2.73%). Materials stalled after a strong January (+4.6%), however Telecoms and Energy now have underperformed two straight months with YTD returns of (-6.27%) and (-3.87%).
The Bloomberg Commodity Index (BCOM) was relatively flat again in February after heavily weighted components crude oil, gold, natural gas, and copper held steady through the month. Gold was again the best performer, gaining 3.75% on the heels of January’s 5.5% gain. Crude oil remains range bound, gaining slightly over 2% after January’s near 2% decline. By all accounts the OPEC production agreement is on target with about 90% compliance, but oil inventories continue building. The OPEC agreement is set to expire in June, but the current thinking is that will be extended. The industry is undergoing a shift in fundamentals with the rise of US shale production and the reduction of costs due to technological advances. The US exported 3.5 million barrels of crude in February, the most of any month going back to 1993 according to EIA data.
The next FOMC rate decision scheduled for March 15, and expectations have steadily risen from 32% on February 1 to 90% on March 2, according to Bloomberg. Closely watched comments from Fed members are increasingly hawkish: San Francisco Fed President John Williams is on the record saying a hike in March is “very much on the table” and New York Fed President William Dudley says the case for a hike has become “a lot more compelling.” Not surprisingly the dollar rebounded 1.6% after a decline in January. Adding to the growing chorus for a hike is February’s economic data, which reflects an expanding economy. Despite lower Q1 GDP estimates, existing home sales hit their highest level in January in a decade, February ISM Manufacturing hit its highest level in three years, December retail sales were revised higher, January data was generally well received, and employment data is consistently good (but not great, yet).
Still, some think the Fed will hold off raising rates at the March meeting to await French election results on April 23, similar to the stance ahead of the Brexit vote. The Fed has also maintained that it is ‘data dependent,’ and as such could wait until new Administration policies get enacted and reflected in economic data before taking action.
The bull market is continuing in March due partly to Trump’s well-received Congressional testimony, as well as hawkish commentary by Federal Reserve officials, which has markets greatly increasing their expectations for a March rate hike. The Dow moved above 21,000 on the first trading day in March, only 24 days after surpassing 20,000, tying a record for the shortest time between 1,000 point moves (1999). March also has some very strong seasonal tendencies working in its favor. Over the last 5, 10, and 20 years, the average monthly return for March ranks #2, #1, and #3 of all twelve months.
There are a number of events in March that could make it an interesting month. The ECB meets on March 9, and markets will be looking for signs of EQE tapering. The next day is the US monthly NFP report where economists are looking for slowdown of net new jobs to 174k from last month’s 227k. This report could be the deciding factor whether the Fed raises rates at its next FOMC meeting on March 15. The probability of a rate hike has risen sharply over the last week from the low 30’s to now 90%, according to Bloomberg. Two days later on March 17, the debt ceiling will officially be reached. This is a soft deadline, as the government has a number of levers it can pull (i.e. postpone retirement payments) that can stretch the deadline well into Q2. Next is the G-20 meeting of finance ministers on March 17 and 18 where Treasury Secretary Mnuchin will make his first appearance. Markets will be listening intently for any possible comments on “currency manipulation”.
Also in Europe, the sovereign and banking debt issues still lurk below the surface, as do elections in a number of key countries that could have market-moving consequences. According to Stratfor, “Between March and September, the Netherlands, France and Germany will hold general elections whose outcomes will help determine the future of Europe's common currency.” Italy may also hold a vote by the end of the year. Unlike Greece, France and Italy are “too big to fail.” There is also the threat of a Greek exit from the European Union. Most Greek debt in now in institutional hands, making the “contagion” threat less than in 2012, but uncertainty is usually not market-friendly.
From an equity perspective, one sector that could see a sharp rebound in March is energy. Crude oil exhibits very strong seasonal patterns from February through June. Over the last ten years crude oil’s average monthly return in March is 4.3%, behind only April and February’s 6.5% and 5.1% average returns. While crude gained 2.3% in February 2017, the energy sector ETF, XLE, declined (2.1%). This divergence between the commodity and the stocks is not the norm and unlikely to repeat going forward. Year-to-date, the XLE has declined 5.2% despite a wildly bullish environment in the broader markets. While underperforming the broader benchmarks is usually a big red flag, time frame is important for context. Keep in mind that Energy was the top performing sector in 2016 with a 23.7% gain. Thus 2017’s slow start could be attributed to short term sector rotation as investors locked in the gains from 2016, suggesting this year’s decline is a simple correction and not a reversal of the longer-term trend. The technical picture also appears very favorable.
The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. All information contained herein is obtained by Nasdaq from sources believed by Nasdaq to be accurate and reliable. However, all information is provided “as is” without warranty of any kind. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.
Nasdaq's Market Intelligence Desk (MID) Team includes:
Michael Sokoll, CFA is a Senior Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.
Jeffrey LaRocque is a Director on the Market Intelligence Desk (MID) at Nasdaq, covering U.S. equities with over 10 years of experience having learned market structure while working on institutional trading desks and as a stock surveillance analyst. Jeff's diverse professional knowledge includes IPOs, Technical Analysis and Options Trading.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
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Brian Joyce, CMT has 16 years of trading desk experience. Prior to joining Nasdaq Brian executed equity orders and provided trading ideas to institutional clients. He also contributed technical analysis to a fundamental research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Airline companies among others understand the trading in their stock. Brian is a Chartered Market Technician.