February reversed the optimism that prevailed in January’s market results. The economy was still resilient with retail sales +3%, despite an increase in inflation. The consumer evidenced ample savings and a willingness to spend.

Another market shift witnessed more money movement towards U.S. Treasuries and out of equities. Long a dormant area for investment, Treasuries are now a competitive and attractive alternative to stocks. Short-end maturities have better yields than most equities. Money markets now support cash positions with real yields. Our portfolios have long adjusted to the risk factors with higher cash and U.S. Treasury positions. In taxable accounts, Treasuries are exempt from state and local taxes, enhancing yield.

S&P500:  Feb -2.61%, YTD +3.40%               DOW:  Feb -4.19%, YTD -1.48%
NASDAQ:  Feb -1.11%, YTD +9.45%              Russell 2000:  Feb -1.65%, YTD +7.89%

Sector Performance Year-to-Date

Communication Services +8.90%                    
Consumer Discretionary +12.4%
Consumer Staples -3.5%                                
Energy -5.1%
Financials +4.1%                                            
Healthcare -6.6%
Industrials +2.5%                                             
Materials +5.2%
Real Estate +3.2%                                          
Technology +9.6%
Utilities -8.3%

The stock market in January perceived the Federal Reserve was working toward a termination of rate raises. However, in mid-February the market view shifted again. The new market narrative was that the Fed was only developing the time frame to conclude rate increases. The inflation data continued to come in higher than desired, and the Fed reiterated that the new inflation data could stretch out the tighter interest rate policy higher and for longer. The market pundits responded by moving up the projected Fed Funds rate to the 5.5% zone or likely higher. The Fed will remain data dependent and the markets will continue to be volatile day to day.

Projected earnings expectations for the S&P500 in 2023 continued to be lowered by strategists. This in turn, put pressure on stock prices. In June 2022 projections were at $252ps and by December 2022 had been reduced to $231ps. Fast forward to March 2023 and the projected number has fallen to $222ps. The decline lends support to the voices calling for a modest recession. The current interpretation leans toward a flat 2023 earnings result.

Renewed geopolitical tensions with China are promoting a response. Germany is the latest country to criticize China should they help Russia with weapons. While the Ukraine and Russia conflict rages on, North Korea is agitating South Korea. This keeps the global economic outlook complicated and cloudy. The U.S. economy is functioning the best in the world, and we expect inflation to be tamed. The Fed is on the right path and close to the final determination. The second half of 2023 will start to lift the view.