The market’s 2023 rally fizzled in February as strong economic data led to the realization that rates may need to be higher than expected in order to tame inflation. This resulted in a meaningful uptick in rates and a further inversion of the yield curve, which drove the Bloomberg Aggregate Bond index lower by 2.59%. U.S. stocks, trading on the hopes of a Fed pivot later in the year, also sold off, with the S&P 500 declining by 2.44%. Outside of the U.S., expectations for higher interest rates bolstered the dollar, which gained roughly 2% on the month. This put additional pressure on prices for non-U.S. assets, as well as commodities markets.
Equity
U.S. equities reversed course in February, retracing much of January’s gains, as a hotter-than-expected jobs report and a disappointing inflation print cooled investor optimism. One trend that did not reverse course though, was growth’s leadership over value, with the Russell 1000 Growth index declining by just 1.19%, while the Russell 1000 Value index fell by 3.53%. This runs counter to what investors observed in 2022, where higher-duration growth names underperformed as interest rates increased. However, looking under the hood of the growth index, it appears as though growth’s outperformance was more idiosyncratic than systemic, with just three names (Apple, Tesla, & Nvidia) accounting for more than half of the index’s 7.05% YTD return.
Non-U.S. equity performance was mixed during the month. European stocks advanced slightly on positive economic data, while emerging markets sold off on weakness in China. However, both the MSCI EAFE and MSCI EM indices found themselves squarely in negative territory in February (-2.09% and -6.48%, respectively) when we factor in the impact of the U.S. dollar. Along with U.S. rates, the dollar surged higher on the month, gaining nearly 3% versus the EAFE basket of currencies and roughly 2% versus the emerging basket.
Fixed Income
U.S. investment grade bonds sold off in February, as rates increased across the yield curve and the level of inversion between the 2- and 10-year treasury expanded from 68 bps to 89 bps. This resulted in losses for nearly all fixed income asset classes (excluding cash), with the Bloomberg Aggregate Bond index declining by 2.59%. Lower duration assets, while still negative on the month, provided some level of downside protection. High yield bonds, for instance, declined by just 1.29% in February, while the 1-5 year treasury index fell 1.25%.
Real Assets
Broad-basket commodities continued to underperform in February, tacking an additional 4.70% decline onto January’s 0.49% loss. Commodity prices were generally lower across the entire complex. Within the energy sector, crude oil prices felt pressure, as U.S. oil supplies continued to rise, while mild winter weather continued to weigh on natural gas prices. On the other side of the spectrum, precious metals also faced price declines, as higher interest rates increased the attractiveness of U.S. treasury securities versus gold, which has historically been viewed as a safe-haven asset.
Closed End Funds
Closed end funds gave back some ground in February, but in general held up relatively well given the uptick in both interest rates and equity market volatility. At a universe level, discounts remained relatively stable, ending the month at approximately 5.50% below NAV. Of the major market segments, municipal bonds experienced the greatest degree of discount widening, which is likely a result of their longer duration profile. On the month, the average municipal bond saw its discount widen by just over 100 bps, ending February at approximately 8.50% below NAV.
iCM Tactical Strategies
iCM’s tactical strategies, which utilize ETFs and/or mutual funds, experienced somewhat of a mixed month in February. Our overall fixed income strategy benefitted from its underweight to duration, while our out-of-benchmark position in emerging markets local bonds detracted from relative results. Performance for our general equity strategy was supported by our overweight to non-U.S. developed value, while positions in emerging markets and broad-basket commodities created relative performance headwinds.
Important Disclosures
Integrated Capital Management, Inc. is an SEC Registered Investment Advisor. Registration does not imply any certain level of skill or training. This blog is intended solely to report on various investment views held by Integrated Capital Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security.
Past performance is no guarantee of future results. Please note that investments in foreign markets are subject to special currency, political, and economic risks. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index.
Any capital markets views are intended solely to report on various investment views held by Integrated Capital Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Outlook may change at any time given shifting market conditions. Past performance is no guarantee of future results. Please note that investments in foreign markets are subject to special currency, political, and economic risks. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index
Closed end funds are exchange traded, may trade at a discount to their net asset values and may deploy leverage. When the strategy purchases shares of a closed-end fund at a discount to its net asset value, there can be no assurance that the discount will decrease and may possibly increase. If a closed-end fund uses leverage, increases and decreases in the value of its share price may be magnified. Distributions by a closed-end fund may include a return of capital, which would reduce the fund’s net asset value and its earnings capacity. Closed end funds are offered by prospectus. The prospectus and/or other applicable offering documents contain this and other important information about the investment strategy. You should read the prospectus and/or other applicable offering documents carefully before investing. Investors should consider the investment objectives, risks, charges and expenses of the investment strategy before investing. iCM uses third-party data that is believed to be accurate and complete. All data is subject to change.
TICE Blended Benchmark comprised of 32% S&P 500/8% MSCI EAFE/38% Barclays Aggregate Bond/20% Barclays Municipal Bond/2% Cash
FTSE NAREIT All Equity REITs TR = U.S. REITs
S&P 500 Index = U.S. Large Cap
Russell 1000 Growth TR = U.S. Large Growth
Russell 1000 Value TR = U.S. Large Value
Russell 2000 Index = U.S. Small Cap
MSCI EAFE ND USD = Developed International Equities
BC High Yield Corp Bond = High Yield Bonds
BBgBarc Municipal TR = Municipal Bonds; BBgBarc
US Credit TR = U.S. IG Corp Bonds
BC Aggregate Bond = U.S. Taxable Bonds
Barclays Treasury TR = U.S. Treasury Bonds
MSCI Emerging Markets ND USD = Emerging Markets Equities;
JPM GBI EM Glbl Divers TR = EM Bonds;
Bloomberg Commodity TR USD = Broad Basket Commodities
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