Market Review
Global equities declined in February after a strong start to the year. There were large regional performance differentials with Emerging Markets hit hard while Europe remained resilient. In the US, almost all S&P 500 sectors fell. Technology was comparatively strong while Energy was amongst the weakest sectors with investors eyeing potential cost pressures.
Source: MSCI
Fixed Income was also down on the month in aggregate as the yield on the 10-year Treasury note climbed by 40 basis points to 3.92 percent, the highest level since mid-November. Shorter-term rates rose by less, with the 3-month Treasury yield rising by 18 bps to 4.88 percent, the highest level since the middle of 2007. The shape of the yield curve remained deeply inverted, an ominous sign as this has historically been one of the most reliable recession predictors.
At the Federal Open Market Committee (FOMC) meeting on February 1st, Fed Chair Jerome Powell reaffirmed that a slowdown in inflation is underway, and that the Fed’s 2% target is achievable, but stronger than expected economic data and a very tight labor market warrant a hawkish stance. The Fed followed through with a 25 bps increase in the Federal Funds Rate. Minutes from the meeting showed that while almost all members agreed to slow the pace of rate hikes, the consensus was that rates may need to rise further than was initially assumed in order to bring inflation under control. As a result, February was marked by financial markets pricing in the likelihood of a higher-for-longer interest rate regime. By February 28th, the market was pricing in a terminal rate of 5.41%.
Source: Bloomberg as of Feb 28
A stubbornly tight labor market is of particular concern to the FED as it makes their job of controlling inflation much more difficult. The chart below shows the steep rise in JOLTS nonfarm job openings vs. the number of unemployed workers. The ratio reached record highs during the economic reopening, signaling that demand for labor has outpaced supply and workers feel emboldened to seek out better job opportunities, resulting in elevated labor market churn and upward pressure on wages and prices.
Source: J.P. Morgan Asset Management
Portfolio Review
Equities
In Equities, our position in GSIE (Goldman ActiveBeta INTL ETF) helped performance in large part due to an overweight to Western Europe. Our rotation from JEPI (JP Morgan Premium Income ETF) to BAUG and BFEB (U.S. Equity Buffered ETFs) also helped returns. However, our position in GEM (Goldman ActiveBeta EM ETF) detracted from performance as countries such as Brazil, China and South Korea underperformed.
Moving forward, we are near-term cautious on equities but medium-term bullish. We expect elevated volatility and prefer low-beta defensive exposure to U.S. equity via buffered ETFs.
Fixed Income
In Fixed Income, our short duration profile helped performance relative to the longer duration benchmark. As yields rose in expectation of higher-for-longer Fed policy, our short duration positions such as IBHY (iBonds HY 2023 ETF) and IBDP (iBonds IG 2024 ETF) outperformed. On the negative side, (EDD) Morgan Stanley EM Domestic Debt Closed End Fund hurt returns as did our position in IVOL (Interest Rate Volatility and Inflation Hedge) due to continued yield curve inversion.
We are moderately underweight fixed income as we move into March. While we believe inflation has peaked, it remains high, therefore eroding real returns. We are taking advantage of higher yields primarily through our bond laddering approach using diversified target-term fixed income ETFs.
Alternatives
Our position in gold (GLD) detracted from performance in February. We anticipate market volatility, and despite recent price action, we expect gold will act as a defensive real asset offering an attractive risk-reward profile.
Detractors from Performance
Contributors to Performance
Emerging Market Sovereign Debt (EDD)
Interest Rate Volatility and Inflation Hedge (IVOL)
Emerging Market Equity (GEM)
International Developed Equity (GSIE)
Innovator U.S. Equity Buffered ETFs (BFEB and BAUG)
Laddered iBond ETFs
Overweight
UnderWeight
Gold
Fixed Income
Disclosures: This information was produced by and the opinions expressed are those of Accuvest as of the date of writing and are subject to change. Any research is based on Accuvest proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however Accuvest does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. Any sectors or allocations referenced may or may not be represented in portfolios of clients of Accuvest, and do not represent all of the securities purchased, sold or recommended for client accounts.
The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results. Actual results may vary based on an investor’s investment objectives and portfolio holdings. Investors may need to seek guidance from their legal and/or tax advisor before investing. The information provided may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved and may be significantly different than that shown here. The information presented, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.