A February Swoon

Quick Take: Stocks fell in February as trade uncertainty and economic concerns dominated market sentiment.[1] Bonds benefited from flows seeking safer havens as investors reduced risk. [2]

Stocks ended February in the red after another volatile month was characterized by policy uncertainty.[3] Investors have been struggling to guess whether the U.S. would follow through on implementing announced tariffs.[4]  Markets have seen sentiment softening, with risks ranging from an economic slowdown and trade wars to high valuations.[5]

Source: https://www.bloomberg.com/news/articles/2025-02-26/stock-market-today-dow-s-p-live-updates?srnd=homepage-americas

The S&P 500 index ended February 1.4% lower, although a final day rally helped limit losses for the month.[6] Losses were led by the tech-heavy Nasdaq, which fell approximately 4%. [7] Not only do tech valuations remain high, but AI chip maker Nvidia reported earnings that weren’t quite blockbuster enough for investors, despite remaining strong.[8], [9]

Source: https://finance.yahoo.com/news/wall-street-economic-agita-grows-213402706.html

On the upside, bond markets strengthened – yields declined as data pointed to a softening US economy from data like retail sales, purchasing managers reports, consumer sentiment, and manufacturing. [10] This sent investors scurrying into Treasuries which are seen as a safe haven market. The 10-year U.S. Treasury yield dipped to its lowest level since December to the 4.3% range by month-end.[11] When yields fall, prices rise. Treasuries have had their strongest start to a year since the pandemic months of early 2020.[12]

Even at these levels, yields remain relatively high​, a sea change from the ultra-low rates of the 2010s, spurred by the 2008 rate cuts that lowered rates to 0%.[13] For investors, this means bonds can once again offer meaningful income. Importantly, they offered value as a diversifying stabilizer in portfolios during February’s equity jitters​.

Where does that leave us? Between the presidential election and February 19^th, the S&P 500 had risen by more than 6%. [14] Through the end of February, equity markets gave back a little over half of those gains.[15] By the first week of March, the S&P 500 had erased its post-election gains.[16]

Tariff Talk

At the beginning of February, the White House announced 25% tariffs on imports from Canada and Mexico, 10% tariffs on Canadian energy products, and another 10% tariff on China.[17] In response, China retaliated with a round of tariffs of its own.[18] In addition, the U.S. announced global tariffs on steel and aluminum products.[19]

Not long into February, a 30 day pause on Canadian and Mexican tariffs was announced, as both countries agreed to deploy troops at the border to fight fentanyl trafficking.[20] By the end of the month, the administration indicated it was ready to start Canadian and Mexico tariffs, while adding another 10% tariff on products imported from China.[21] The U.S. also has plans to apply 25% tariffs to the European Union, which has vowed to retaliate against new tariffs.[22] Reciprocal tariffs on nations that tax U.S. goods are meant to begin April 2.[23]

Among the current administration’s economic plan, markets have disliked the tariff proposal the most.[24] Tariffs raise the prospect of price increases and retaliatory tariffs, which can spell uncertainty for businesses. Any tit-for-tat can escalate trade tensions while making business planning difficult. If sustained for several months, the tariffs are likely to hurt US growth and increase inflation.[25] Many investors believed tariffs were primarily a negotiating tactic. [26]

After kicking off tariffs on Canada and Mexico early March, equity markets sold off, and the U.S. once again retreated from tariffs by carving out relief for some goods until Apr 2.[27], [28]

On the economic front, tariffs raise concerns about higher costs and renewed supply chain disruptions. The inflationary impact may require a more nuanced look, as some argue that tariffs cause a one-time disruption, as opposed to sustained inflation. Justifications by the administration for tariffs have included balancing trade, increasing tax revenue, and supporting U.S. manufacturing, while addressing illegal immigration and drug flows.[29] However, the longer-term impact of retaliatory trade wars appears likely to be negative for economic growth.

Survey Data Softens and Consumer Spending Slows

As economic concerns surface, it’s important to note the overall resilience of the U.S. economy. We saw gross domestic product (GDP), a common measure of economic strength, increasing in the fourth quarter at a healthy rate of 2.3%, while unemployment dipped to 4% in January.[30] At these levels, the labor market is largely considered to be at full employment.[31] Analysts are still expecting earnings for S&P 500 companies to grow 11.1% in 2025, compared with 11.7% in 2024.[32]

Source: https://news.bloomberglaw.com/capital-markets/us-stagflation-fears-surface-as-data-hint-at-softer-growth-ahead

Even so, it’s fair to say that economic data seems to be softening. Consumer spending is slowing while the administration vows to make big public spending cuts, which includes thousands of layoffs of federal workers. [33] Indicators of sentiment are moving lower — consumer confidence saw its sharpest monthly decline in February since 2021, while expectations for inflation ticked up. [34]

However, Federal Reserve (Fed) Chairman Jay Powell noted that sentiment readings have not been a good predictor of actual consumption growth, while cautioning against overreacting to one or two readings.[35]

Looking Ahead

Few expect any change in interest rates at the Fed’s Mar 18-19 meeting, as the committee continues to digest the impact of the new policies on trade, tax and immigration.[36]  The Fed appears to be in no hurry to cut rates as they track inflation toward their 2% target.

As the onslaught of headlines continues, we expect no shortage of new details to consume and analyze. In our almost three decades of investment management, we have been through many cycles characterized by vivid projections of boom or bust. Amid the torrent of news, we remain steadfast in our commitment to maintain discipline and follow long-term strategic plans.

Diversification remains key as it’s impossible to predict the constantly evolving fiscal policies. As a reminder, please let us know if any of your financial goals, objectives or circumstances have changed. Don’t hesitate to reach out with any questions about the economy, markets, or your strategy – we are only a phone call away and look forward to catching up with you this spring.

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