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Wall Street to Your Street

February 2018 Market Recap: Stocks Bounce Back After Volatility Rocks Markets

After being rocked by heavy losses in early February, the stock market staged a comeback through the remainder of the month, but still fell short, finishing February with a loss for the first time in 15 months. The S&P 500® Index ended the month down 3.89%.

The burst in volatility came after a particularly placid period in the market –Rocky mountain path including a record 403 days without a 5% correction.1  But with stock valuations at the highest level since 2004, the market finally reversed course, exacerbated by technical developments in the futures and options markets.

From its all-time closing high of 2,872.87 on January 26, the S&P 500® plunged 10.2% through February 8 when it closed at 2,581.00. After that, the market began to regain lost ground amidst a wave of strong corporate earnings reports – closing the month at 2,713.83.  

The NASDAQ Index followed a similar trajectory, dropping 9.7% off its high before regaining most of its lost ground by the end of February.

The MSCI EAFE Index was also affected, dropping 8.9% off its high. But the international markets have been slower to rebound than the U.S. markets.  At the February close, the MSCI EAFE was still down nearly 5% from its January high.  (The MSCI EAFE tracks performance of developed-economy stocks in Europe, Australasia and the Far East.)

Oil prices also got caught in the downdraft, with the benchmark West Texas Intermediate crude dropping 10.5% from its January 26 close of $66.14 per barrel to its February 13 close of $59.19. While oil prices have mounted a fitful recovery, the price was still down 6.8% from its January high at the close of trading February 28.

Here are some other highlights from the year covered in more detail later in this report (Exhibit 1):

  • Retail sales dip. Retail sales dropped 0.3% from the previous month in January, according to the U.S. Department of Commerce.
  • Employers still hiring. Employers added another 200,000 new jobs in January, according to the U.S. Bureau of Labor Statistics.
  • Manufacturing continues to expand. U.S. manufacturing levels have increased for 18 consecutive months through February, according to the Institute for Supply Management.
  • Bond yields move higher. The yield on 10-year U.S. Treasuries continued to climb in February after a big jump in January.  

Exhibit 1
What’s ahead for the economy and the markets? See March 2018 Market Outlook: Strong Corporate Earnings Counter Market Volatility by Mark Simenstad, Chief Investment Strategist. 

Drilling down

U.S. stocks break streak

Imag 2

In February, the U.S. stock market experienced its first monthly drop since October 2016. After closing January at 2,823.81, the S&P 500 ended February down 3.89% at 2,713.83 (Exhibit 2).  The total return of the index for February was –3.69%.  (The S&P 500 Index is a market-cap weighted index that represents the average performance of a group of 500 large-capitalization stocks.)

The NASDAQ Index dropped 1.87% in February, from 7,411.48 at the end of January to 7,273.01 at the close of February. The NASDAQ (National Association of Securities Dealers Automated Quotations) is an electronic stock exchange with more than 3,300 company listings.

Retail sales slip

Retail sales cooled off in January, with a 0.3% decline from the previous month, according to the advance monthly retail sales report issued February 14 by the U.S. Department of Commerce. However, compared to a year earlier, retail sales were up 3.6%.

Among retail categories, auto sales were down 1.3% for the month and building and garden supplies sales – which had been one of the strongest areas of the economy – dipped 2.4%. Department store sales, which had been one of the weakest areas of the retail sector, actually ticked up 0.8%, while non-store sales (primarily online) were unchanged from the previous month.

Unemployment hits 48 year low

The number of initial unemployment claims dropped to the lowest level since December 6, 1969, as seasonally adjusted initial claims dropped to 210,000 for the week ending February 24, according to the Unemployment Insurance Weekly Claims report issued March 1 by the U.S. Department of Labor. The four-week moving average was 220,500 – the lowest level since December 27, 1969.

U.S. employers continued to add jobs in January for the 88th consecutive month, with an estimated 200,000 new nonfarm jobs added to the workforce, according to the U.S. Bureau of Labor Statistics Employment Situation Report issued February 2.

The unemployment rate remained unchanged at just 4.1% for the fourth straight month. That is the lowest unemployment level since December 2000.  Average hourly earnings for all employees on private nonfarm payrolls rose by $0.09 to $26.74 in January, following an $0.11 gain in December.  Year-over-year, average hourly earnings have risen by $0.75, or 2.9%.  (See Job Growth Streak Continues in January)

Manufacturing expansion hits highest level since 2004

U.S. manufacturing levels have grown for 18 consecutive months, reaching the highest level of expansion in February since May 2004, according to the February Report on Business issued March 1 by the Institute for Supply Management.  According to the report, the expansion in manufacturing has been “led by continued expansion in new orders, production activity, employment and inventories, with suppliers continuing to struggle delivering to demand.”

Most sectors drop in February

Ten of the 11 sectors of the S&P 500 suffered losses in February, including significant losses in several sectors. The biggest losers included Energy, down 10.82%; Consumer Staples, down 7.76%; Telecom Services, down 7.06%, and Real Estate, down 6.71%.

The only positive performer was Information Technology, which eked out a 0.10% gain. Exhibit 3 shows the results for all 11 sectors.
Exhibit 3

Treasury yields keep climbing

Exhibit 4Following one of the biggest monthly jumps in recent years in January, the market yield on 10-year U.S. Treasuries continued to climb in February. After ending January at 2.72%, the yield moved up 0.15% in February to close the month at 2.87% (Exhibit 4).

The Federal Reserve Board is expected to raise the Federal Funds target rate by 0.25% at its March board meeting. The Fed has raised expectations that there may be three or possibly four rate hikes during 2018.

Oil prices back-pedal

Exhibit 5After a 37.1% rise in oil prices from August 2017 through January 2018, the oil market finally cooled off in February. The benchmark, West Texas Intermediate crude, dropped 4.77% in February, from $64.73 per barrel at the end of January to $61.64 at the February close (Exhibit 5).

Gold retreats

Gold prices slid in February from $1,343.10 per ounce at the January close to $1,317.90 at the end of February – a 1.88% decline (Exhibit 6). Exhibit 6

International equities drop

The international stock markets, which were also rocked in early February, recovered some of their lost ground, but still remained in negative territory for the month. The MSCI EAFE Index dropped 4.71% – from 2,153.05 at the end of January to 2,051.73 at the February close (Exhibit 7). Exhibit 7

What’s ahead for the economy?  (See March 2018 Market Outlook: Strong Corporate Earnings Counter Market Volatility by Mark Simenstad, Chief Investment Strategist.)

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