Weekly Recap:

by Michael P. Reinking, CFA - Sr. Market Strategist

The seasonals strike again. In a typical year, the month of February can be a little rocky as markets come off the high of a Santa Clause rally and January optimism. That is particularly the case in post-election years with investors acclimating to the change in leadership and policy. In the February after inauguration since 1970 the average return for the S&P 500 is down 1.2% with the index closing lower ~40% of the time. There was a lot of volatility this month, and with a valiant late day rally the S&P 500 closed down 1.4% pretty close to that average. 

There were mounting concerns throughout the month starting with the DeepSeek headlines raising questions about the AI landscape, an escalation of tariff headlines, Elon Musk and DOGE coming into Washington with an actual chainsaw to cut costs and survey data showing growing uncertainty about the overall backdrop given the Washington policy fog.  Despite these headlines markets were able to quickly bounce back after the initial weakness. The S&P 500 was hitting new marginal all-time highs last week but there were signs of caution beneath the surface with investors moving up the quality scale with large caps and defensive sectors outperforming while small/mid cap indices were under pressure. The last move by investors moving out of high multiple momentum stocks seemed to be the final straw. This along with some weak economic data triggered some de-risking an unwind of crowded trades and other speculative assets.   

The downside started to kick in last week and picked up heading into the weekend with the S&P falling for the fourth of the last five Fridays. Those losses have been sequentially increasing with that one other week unchanged (-0.3%, -0.5%, -0.9%, 0% and -1.7%), highlighting the reticence to take risk over the weekend.  Major US indices closed right at key technical levels. The S&P 500 stopped at its 50d moving average just above 6k while small and mid-cap indices closed right around their respective 200d ma’s around the late December lows.  

There was some down-side follow through to start the week with the S&P 500 breaking its 50d moving average but the 100d (green line in chart below) which has been key support throughout the rally starting in Q4 of 2023 provided some short-term support. Major indices were probing key technical levels but were struggling to find new leadership. The intraday volatility began to pick up with Washington headlines often undercutting any bounce attempts with President Trump reiterating that Canada/Mexico tariffs will go into effect as planned next week, an additional 10% tariff on China and then the scenes from the Oval Office today (though that turned out to be short-lived). The intraday range on the S&P 500 exceeded 1% every session this week. 

Up until late yesterday the overall losses were contained but as the S&P 500 broke its 100d the momentum picked up into the close. It was a rough overnight session in Asia and there was some more bloodletting in the crypto complex with Bitcoin breaking below 80k for the first time since November, down >25% from its recent all-time highs. After the US open there was a test of some key technical levels and Bitcoin recouped a good portion of those losses, which led to an early bounce. However, that faded during the Oval Office confrontation. Major indices retested those lows but then markets started to rally in the back half of the session. 

The rally accelerated in the final hour of trade, and I thought Treasury Secretary Bessent’s interview on Bloomberg was partially behind some of that. One of the overhangs on the market has been the 25% tariffs against Mexico and Canada that are scheduled to go into effect next Tuesday, after the initial delay. Border security has been at the center of these negotiations, but it was notable that he highlighted that the administration wants both countries to match tariffs on China, something he suggested Mexico had already offered. This could potentially be an off-ramp in those negotiations.  

Adding to the strength was a big buy imbalance associated with month-end and the MSCI rebalance pushing the S&P 500 up ~1% in the final thirty minutes of trade. It was an interesting day to break that string of down Fridays, with the S&P 500 up 1.6% cutting the WTD losses to 1% and closing just above its 100d ma.

For the month of February, the S&P 500 was down 1.4% with mega-cap tech stocks under pressure. The NYSE FANG+ was down ~3.7% turning negative for the year. Small/mid cap indices were also down between 4% - 6%. 

One of the issues the market is currently dealing with is the unwind of the AI theme. This secular theme has become far reaching beyond just the tech sector and a driver of performance for much of the last year. The capex spending boom was drawn into question last week with some comments from Microsoft's CEO on a podcast and a research report suggesting the company was cancelling leases. This was refuted and ahead of Nvidia earnings on Wednesday night there were multiple corporate updates suggesting no wavering in that spending with reports of Meta working on a new $200B data center project, Amazon reiterating its commitment to its spending plans and NRG and GE Vernova announcing the construction of >5 gigawatts of natural gas power plants. 

That message was also delivered during the Nvidia conference call. The company once again had very strong results but not of the absolute blowout variety seen over the last couple of years. Datacenter strength continued while demand for its new Blackwell chip was "amazing" according to their CEO. As they've been ramping up that production gross margins were a touch light but remain in the low 70's (for context much of the industry is in the 50's ). Commentary from Jensen Huang about the impact of DeepSeek and the future was also positive. It was a rough week for the stock which ended down ~7% despite a 4% rally today. There is still weakness in the AI infrastructure stocks impacting the Utilities and industrial sectors. The industrial sector exposure is particularly impactful for the S&P 400 Mid-Cap index where that sector has the largest weighting ~20% verse ~8% in the S&P 500. 

We highlighted this Capex spending as a potential risk coming into year, if markets began to pushback on that spending. That isn't exactly how things have played out, but markets are clearly getting nervous that the pace spending is going to slow down, and markets often focus on the second derivative or rate of change. That may in fact be the case, but I don't get the sense that the spigot is turning off any time soon. In many cases the aggressive unwind has left valuations much less stretched. Investors have been looking for this trade to evolve shifting from infrastructure to the beneficiaries but in the momentum unwind the software names have gotten hit very hard as well. 

You can see the outperformance of defensive sectors and value verse growth throughout the month. The best performing sector this month was consumer staples up >5%. REITs were not far behind up 4% with the pullback in yields. IPP's and nuclear companies that have been rallying on the prospect of energy buildout were down sharply this month dragging down the performance of the Utility sector though the regulated utilities were up sharply. Energy ended the month up 3%.

Consumer discretionary was the worst performing down nearly 10% much of those losses came from the mega-cap tech components but there were also declines in housing related and cruise stocks. For the last couple of weeks, we've been highlighting the turn in performance of staples vs. discretionary as a warning sign. 

The mega-cap stocks tech names also weighed on communication services but there was strength in other areas of media and telecom. 

Global Markets - Europe and China have been outperforming US markets throughout the year and that continued this week.

Commodities - Volatility Continues

Economic Data/Fed/Credit: 

Markets have been getting increasingly worried that with the policy uncertainty (see Chart)  overall sentiment is souring and will ultimately stifle growth economic growth. This has been showing up in the survey data recently and the most recent was the sharp decline in this week’s Conference Board’s Consumer Confidence Survey. The expectations index fell for the third consecutive month breaking below the closely watched 80 level while 1yr inflation expectations went up to 6% from 5.2%. 

The other notable economic data this week was the increase in initial claims which jumped to ~240k from ~220k, this will be something to watch on a go forward basis as it is one of the highest frequency pieces of data. There was a big rebound in durable goods order after last month’s declines and capital goods orders, a proxy for business spending came in well ahead of estimates. 

This morning PCE inflation data was spot on in line with estimates with core up 0.3% m/m and 2.6% on an annual basis which is down from 2.8% last month. Somewhat encouraging was the decline in services PCE which fell to 3.4% from 3.9%. 

Personal income came in well ahead of estimates up 0.9% above the 0.4% estimate. There was a decline in personal spending which fell -0.2%. The decline in spending shouldn’t be too surprising given the weak retail sales but it is going to add to growth concerns, though not necessarily reflected in the comments on retail earnings calls. The increase in income will add to some of the sticky inflation concerns but the decline in services PCE offsets that.

This morning’s trade deficit exceeded $150B well ahead of estimates. There was likely some pull forward of demand related to tariffs, but this will provide additional ammunition for the administration. This along with the decline in consumer spending caused the Atlanta Fed GDP Now forecast to be revised sharply lower to -1.5% from 2.3%. This is a very volatile tracker, so markets did not overreact though it did cause a modest pullback on the release. 

There has been a mix of Fed commentary throughout the week but broadly the message is that they are still firmly in wait and see mode. The increase in inflations is not going to make it easy for the Fed to pivot. Markets have been adjusting with rates moving sharply lower now starting to price in 2-3 cuts by year end. The 10yr is down ~60bps from the high hit in mid-January and is currently testing its 200d moving average. From a portfolio perspective Treasuries have been showing negative correlation offsetting some of the equity pain. 

Very notable during this selloff is the fact that credit markets are holding up very well particularly investment grade. There has been some widening of spreads, but they remain very contained.

It will be an interesting week with plenty to watch on the geopolitical front, hard economic data and late cycle tech/retail earnings. The tariff deadlines on Tuesday will be closely watched which comes ahead of President Trump's State of the Union Address on Tuesday night. It is also notable that this falls at the start of China's People's Congress. The key economic data includes the ISM surveys and labor market data in the US. In Europe inflation data is released and the ECB is widely expected to cut rates. Have a great weekend!

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