Flat February: Street Stays Put Amid Global Uncertainty

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Broader U.S. equity markets ended February not too far from where they started, but weren’t completely void of the volatility that gripped sentiment in the first month of 2016.

For the month, the Dow ended slightly in positive territory, gaining 0.34% to 16521. It was as different story for the other two major averages, which extended a two-month losing streak to three: The S&P 500, thanks to a late-session swoon on Monday, ended the month down 0.36% to 1933, while the Nasdaq closed out the second month of the year 1.16% lower, falling to 4560.

From a sector perspective, materials, industrials, and telecommunications were the top three performers of the 10 S&P 500 sectors, while financials, energy and technology rounded out the bottom three.

Bill Merz, chief investment officer at U.S. Bank’s Private Client Group, said February was, in part, a bounce back month from a dismal January.

“We see materials up 7%, but they were down 10.5% in January, so it’s almost an inverse mirror image of last month’s performance. Industrials are up 3%, but they were down 5.5% in January. So, we’re seeing a couple of those sectors recoup a portion of those losses experienced in the first month of the year,” he explained.

Quincy Krosby, market strategist for Prudential Financial, said the monthly gain in materials was thanks to commodity prices that moved higher during February. Still, she said some of the sector’s names were among the most beaten down in the market.

“We saw traders taking advantage of any move higher,” she said. “We saw gold doing very well, and that was probably the best asset class for February. It’s yet another example of how concerned investors are about the potency of any central bank action.”

For its part, gold saw gains of 10.52% for the month as traders sought the safety of less risky assets when compared to equities and oil. Up for both January and February, the precious metal saw the biggest two-month percentage gain since August 2011. From February of 2015, gold is up 2.17%.

Arguably the biggest driver for the market, though, continued to be crude oil prices as the S&P 500 moved nearly in lock step with the commodity through the month. Crude prices saw slight monthly declines as the U.S. benchmark extended three months of losses to four. West Texas Intermediate slipped 0.39% in February to $33.75 a barrel.

Extending January’s volatility, global oil prices saw huge price swings in February, with WTI touching a fresh 12-year low of $26.21 a barrel before bouncing back up in the low-$30-a-barrel range. The momentum in either direction came after some of the world’s biggest oil producers hinted they could agree on capping future output at January levels.

Krosby said that talk alone has been enough to give the market hope that higher prices linger on the horizon, but she doesn’t see OPEC nations – of which Saudi Arabia and Qatar were part of the initial suggestion of a production freeze – taking action any time soon. Mostly, she said it’s because each nation, though part of one cartel, doesn’t want to give up its own market share to simply give it to either another OPEC country, or worse in their view, a U.S. or Canadian shale producer.

“If prices climb higher, what it’ll do is resurrect quite a bit of shale capacity in the U.S.,” Krosby said. “What we’ve seen are shale producers in the U.S. able to produce at the $30-a-barrel level. If you push [the price] higher, you’ll see more production.”

For the market overall, Krosby said while Wall Street was flat to down for the month, in order to see a rally, or even gains,  in March – which is historically a good month for the market – the tug of war between the bulls and the bears has to end.

“We need a clutch of data that continues to surprise to the upside, or have investors believe a recession is not imminent,” she said. “For this market to continue moving higher into a cyclical run, we need to be assured fresh money is coming into the market. That’s very important heading into March.”

Macro Market Drivers

The Federal Reserve was notably absent from the picture in February as the U.S. central bank got a scheduling reprieve with no policy-setting Federal Open Market Committee meeting on the books. That forced market participants to pay close attention to key economic data, which showed an ultimately mixed picture for the month.

Core personal consumption expenditures (PCE) data, the Fed’s preferred measure of inflation in the U.S., increased 0.3% in February, while it saw a 1.7% increase from the same period in 2015, ever closer to the central bank’s 2% target.

“Investors certainly took notice, as the odds of a rate hike in June rose to 35% on Friday following the PCE report, up from 24% the day prior, and for December, the odds rose to 53% from just 36%,” David Joy, chief market strategist at Ameriprise Financial, said in a note.

Elsewhere, durable goods orders were surprisingly positive for the month, while the second reading on fourth-quarter gross domestic product was unexpectedly revised up to 1% annualized growth from a prior reading of 0.7%.

Merz noted that the American consumer was also a bright spot for the month as hard data showed shoppers were willing to spend their dollars – though consumer sentiment data painted a different picture, posting declines after three months of gains.

“Actual fundamental data shows the consumer is quite strong, but if the level of confidence, which can be traced back to capital markets and the media depiction of the market moves, that perception on the part of the consumer can become self-fulfilling and manifest itself in lower spending,” he explained.

Personal income and spending data from the Commerce Department showed increases on both counts: Income levels rose 0.5% in January, slightly more than the 0.4% expected rise, while spending posted a 0.5% gain compared to expectations for a 0.3% move higher. Further, retail sales also posted a slightly better than expected performance: Sales rose 0.2% last month, compared to 0.1% views. Excluding the volatile autos component, sales saw a 0.1% gain compared to expectations for it to hold steady.

Still, housing data and both services and manufacturing PMIs came in weaker than expected.

All eyes will be focused on the February jobs report due out on Friday, which could give a snapshot of the continued improvement in the labor market. Economists hope to see a continued pick up in wages and the number of people added to U.S. payrolls.