Market drop. February was the most eventful month we have had in about two years, for the stock market at least. The drop of about 10 percent in U.S. markets at the start of the month rattled investors and raised the real question as to whether the good times were over.
The rest of the month, however, suggested that the world was not ending just yet. After dropping 10 percent, markets recaptured about half of that. At month end, while investors remain alert, the mood is much better than it was. By and large, expectations are that the good times will continue, although with more volatility than we have seen recently.
Strong economic fundamentals. The reason for this is continuing strong economic fundamentals. Job growth remains strong, with a gain of 200,000. Both consumer and business confidence also continue to be at very high levels. Consumers are spending, while businesses are still investing. Even political worries, which rattled markets in February, have subsided with a multi-year budget and spending deal keeping the government open. Simply put, most of the economic worries we had in February were alleviated by good data.
Good news for corporations. At the corporate level, the news was also good. More than three-quarters of companies in the S&P 500 grew their sales more than expected, while 90 percent earned more per share than expected. Earnings growth for the S&P 500 came in at the highest level since 2011 and is likely to keep doing well in subsequent quarters. Market fundamentals remain solid, and this likely cushioned the downturn and drove the bounce.
Despite the solid fundamentals, of course, markets did end the month down. But as this was the first time since October 2016—a historically unprecedented streak of up months—one down month is overdue, if anything.
Weakening economic data. Looking forward into March, the question is whether the good economic news will continue to support markets and even drive them higher. Here, the news is a bit more mixed. Economic data looks to be slowing, with the housing industry in particular looking softer, as well as business investment. While confidence remains high, the hard data is not as positive.
Rising rates. In particular, the one real concern in February—rising interest rates—looks likely to continue in March and possibly even get worse. Rates rose in February, hitting both stocks and fixed income, and remain at high levels for recent history. Worse, Jerome Powell, the new chair of the Federal Reserve, was perceived as sounding hawkish on rates and inflation in his testimony before Congress. The story to watch for March will be whether interest rates continue to rise, and whether the Fed tries to talk them down if they do.
Market outlook. Even if rates do keep going up, though, the outlook remains reasonably favorable for markets. Rising rates, early in the cycle, typically reflect faster growth rather than rising inflation and are actually positive for markets. That will change later, of course. For right now, rising rates are more of a good sign than a bad one. Similarly, job growth is likely to stay healthy for the immediate future. Plus, with consumer and business confidence high, signs of an economic pullback don’t look likely anytime soon.
Overall, February was a much better month than a look at the financial markets would suggest. As such, with strong foundations, March looks likely to be a better month as well.