S&P 500 Erases Post Election Gains
Global Stock Market Returns
· S&P 500: -1.3%
· Dow 30: -1.16%
· NASDAQ: -3.91%
· Russel 2000: -5.35%
· MSCI EAFE: 1.95%
· MSCI Emerging Markets: 0.5%
Bond Market Performance
· The 3 Month US Treasury Rate remained Steady at 4.32%
· The 2 Year US Treasury Rate declined 23bps to 3.99%
· The 10 Year US Treasury Rate declined 34bps to 4.24%
Major Headlines
· Trade Tensions: Ongoing trade negotiations between the U.S. and China, with new tariffs announced but delayed pending further talks. [1]
· Federal Reserve: The Fed maintained interest rates at 4.25%-4.50%, emphasizing the need to address inflationary pressures [2]
Economic Data
· Job Growth: The US economy added 151,000 jobs in February, with the unemployment rate steady at 3.91% [3]
· Inflation: The Consumer Price Index (CPI) rose by 0.5% month-over-month [4]
· Economic Growth: Mixed signals with strong consumer spending but concerns about potential stagflation. [5]
Investor Sentiment
· Shift in Preferences: Confidence in “US Exceptionalism” weakened, with investors favoring European stocks over US Equities. [6]
· Caution on Recession: Concerns about a potential global recession and ongoing geopolitical tensions tempered investor optimism. [7]
Citations
1. https://www.nasdaq.com/articles/february-2025-review-and-outlook
2. https://www.federalreserve.gov/monetarypolicy/beigebook202502-summary.htm
3. https://edition.cnn.com/business/live-news/us-jobs-report-february-2025
4. https://www.fanniemae.com/research-and-insights/forecast/economic-developments-february-2025
6. https://www.zacks.com/stock/news/2419012/investor-sentiment-at-15-year-high-etfs-in-focus
7. https://www.lpl.com/research/blog/investor-sentiment-hits-extremely-bearish-levels.html
Commentary:
For the last few months, we have been writing about our expectations for heightened market volatility in 2025. Last month specifically, we highlighted tariff concerns and wrote about how we planned to scale back risk in specific areas of the markets moving forward. We did so by selling IJT (Small Cap Growth), PSCI (Small Cap Industrials), and UUP (US Dollar) in our portfolios, which returned -5.28%, -6.46%, and -0.41%, respectively in the month of February. We have also been stressing that a globally diversified portfolio is preferred a domestic-focused one as we believe diversifying across various international markets can help mitigate risks associated with any single economy. In February we saw the positive effects that Global Diversification can have on portfolios with the MSCI EAFE index up 1.95%, while the S&P 500 had a negative return of -1.3%. Over the past several years, this global focus has been a bit of a drag on our portfolios when compared to US only markets. However, it is showing up when domestic markets are pulling back.
We do expect some of these same trends to continue as we move through the first half of 2025 as both growth concerns in the US and trade uncertainty remain prominent. The reinstatement of tariffs on global still and aluminum imports, along with the introduction of reciprocal tariffs, has further fueled market uncertainty. Thus, we have seen an increasing number of executives express concerns over potential economic repercussions in quarterly earnings reports and have seen stock prices reflect those concerns.
Additionally, when we look back in 2023, some of your recall many professionals were talking about a pull back as the economics did not support the continued growth of the stock markets, including ourselves. However, as we wrote about in late 2023 and early 2024, we, nor others in the industry accounted for the increase in government spending. If DOGE does what it reports that it will do, this reduction in government spending also could lead to a pull back or at least some choppy waters ahead.
Conclusion:
Due to these factors, we believe volatility may be here to stay in 2025 or at least over the next 4-8 months. Below is a chart from Bloomberg Finance showing the average price move of S&P 500 by day of the week, comparing 2025 to the historical average going back to 1928.
As you can clearly see 2025 has been volatile and those who have not had diversification within their portfolio have felt that volatility more so than others. As we move forward, we continue to favor value stocks over growth stocks in the equity market as value stocks tend to out preform growth over long periods of time and often times have lower volatility . As a reminder, value stocks typically have lower P/E ratios and higher dividend yields, have historically offered a more stable investment during uncertain times. The chart below compares the Annualized Standard Deviation of Monthly Returns of the Russel Value and Russel Growth Indexes. As a reminder, higher standard deviation indicates more volatility, while lower standard deviation signifies steadier returns.
If you’d like to learn more about Growth vs Value, please click on the links below to view our previous articles that go in depth on the topic.
Growth vs. Value: Is It Time for Value to Take the Lead? - Part 1 — SBC Investment Management
Growth vs. Value: Is It Time for Value to Take the Lead? - Part 2 — SBC Investment Management
We will continue to be shorter on the yield curve as well on the fixed income side as we interest rates are showing signs of uncertainty. We’ll continue to advocate for global diversification in the portfolio over being strictly domestic as well as having crisis alpha allocations (Satellite 5) that are uncorrelated with the general market as a whole. Remembering this is a marathon not a sprint will help keep things in perspective.
Model Performance Update
Our Moderate Model Portfolio returned 0.9% during the month of February and has returned 3.72% YTD.
Changes to the model portfolio in February
· 2/4/2025 – Removed IJT (Small Cap Growth) and PSCI (Small Cap Industrials) from Satellite 1
· 2/4/2025 – Added XLF (Financials) to Satellite 1
· 2/4/2025 – Removed UUP (US Dollar) and replaced it with a cash alternative in Satellite 3
February Performance with Benchmark
YTD Performance with Benchmark
If you were to have any questions regarding the above, please reach out to us to set up a one-to-one meeting to review your situation.
Sincerely,
Bryant Andrus, MSF, CFP®
President
SBC Investment Management
P: (602) 641-5996
M: (319) 520-2033
E: bandrus@sbcinvestmentmanagement.com
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