February 2023 Market Review

Fidelity Bank – Wealth Management
February 2023
William J. Fennie III, CFA

Hotter than expected CPI and PCE prints diminished investor optimism in February. The headline CPI printed at 6.41% YOY while the median forecast was expecting 6.2% YOY. PCE also surprised to the high side with a reading of 4.71% YOY versus market expectations of 4.30% YOY. Investors and speculators had previously priced in lower Fed rate hikes and potential rate cuts because of disinflationary data over the past several months. With these higher-than-expected inflation readings, the S&P 500 sold off by 2.44% and the Bloomberg US Aggregate Bond Index ended the month lower by 2.59%.   

Economy

On February 27^th, pending US home sales for January were released with the index showing a strong increase of 8.1% over the previous month. This was the second consecutive monthly increase following December’s increase of 1.1%. These increases represent a bright spot in the housing market after 13 consecutive months of declining sales, as rapidly rising mortgage rates and low inventory have stifled demand. Nationally, the median sales price for existing homes has fallen 13.24% from its June 2022 peak of $413,800.00.  Typically, January sales represent the lowest median sales price in any given year. It will be interesting to see if the median sales price continues to decline throughout the remainder of 2023.   

Source: Bloomberg, LP.

Equity 

Equity markets were hampered in February (S&P 500: – 2.44%) by higher-than-expected inflation prints and hawkish Fed rhetoric. Growth Stocks, which jumped out of the gate in January, fell 1.19%, while Value Stocks, which tend to be more economically sensitive, fell 3.53% as investors lamented potentially recession causing rate hikes. Small Caps retreated by 1.69%. Market participants continue to weigh a mediocre earning season, less than ideal equity valuations, and potentially stalled economy due to Fed interest rate hikes.

Higher inflation prints and subsequently higher yields restored strength in the US dollar in February with the Dollar index rising 2.82%. Non-U.S. equities, both developed and emerging, fell more in US dollar terms than in their local currency terms. The MSCI EAFE lost 2.09% in USD but gained 0.62% in local currency terms. MSCI EM lost 6.48% in USD but only 4.65% in local currency.

Fixed Income 

Again, higher inflation prints impacted every tenor of the US yield curve, with yields increasing at every maturity. The 12-month Treasury Bill saw its yield increase by 33.7 basis points to finish the month at 5.01% yield to maturity (YTM). The 10 Year Note jumped 41.2 basis points to close February at 3.92% YTM, the highest yield since last November.

Along with the rise in rates, spreads between Treasuries and US Corporate Bonds also rose modestly, an increase of 14 basis points to 1.59%. The rise in rates and spreads left the Bloomberg US Aggregate Index lower by 2.59% for the month, while the Bloomberg US Corporate Bond Index lost 3.18%. High Yield Bonds, which are more sensitive to changes in spreads, only lost 1.29% in February. Currently, High Yield Bonds yield roughly 5% more than Treasuries, which is in line with their historical average.

Source: Federal Reserve, Bloomberg, LP.

Real Assets 

Despite higher inflation prints, fears of an economic slowdown weighed on most commodity markets in February. The broad-based Bloomberg Commodity Index fell 4.70%. Industrial Metals and Precious Metal were the biggest drags with declines of 9.14% and 6.80% respectively. Livestock and Softs were the only positive commodity sectors, up a modest 0.83% and 0.41%, respectively.

February 2023 Market Review is intended solely to report on various investment views held by Fidelity Deposit & Discount Bank and is distributed for informational and educational purposes only and is not intended to constitute legal, tax, accounting, or investment advice. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Fidelity Deposit & Discount Bank does not have any obligation to provide revised opinions in the event of changed circumstances. All data is provided by Bloomberg Finance, LP and Morningstar Direct. We believe the information provided here is reliable but should not be assumed to be accurate or complete. Data, if not otherwise noted, is as of 2/28/2023. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Past performance is no guarantee of future results. All investment strategies and investments involve risk of loss and nothing within this report should be construed as a guarantee of any specific outcome or profit. Investors should make their own investment decisions based on their specific investment objectives and financial circumstances and are encouraged to seek professional advice before making any decisions. Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. The S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large‐cap segment of the U.S. equities market.

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