February 2023 | Global Equity Markets Review
Equity markets paused in February after a strong start to the year. The S&P 500 Index total return was -2.44%, while the S&P 400 Mid Cap and 600 Small Cap Indexes did modestly better at -1.81% and -1.23%, respectively. Cyclical stocks outpaced non-Cyclical stocks last month as economic momentum surprised to the upside. Growth stocks did better than Value stocks despite the rise in interest rates, which typically are a more significant headwind for highly valued equities. Selling was persistent throughout the month, with the broad U.S. index peaking on the second trading day of the month.
Inflation continues to dominate headlines, with the narrative shifting to the slope of the glide path toward lower levels. The primary connection to stock prices is inflation's impact on company earnings. Most companies can initially raise prices fast enough to offset the input costs of labor, materials, transportation, and capital. However, it is becoming evident that persistent inflation is shifting consumer and business buyer preferences to offset rising prices. Wall Street analysts who take their cues from company guidance have consistently lowered their forward-looking estimates for 2023 earnings since first publishing their forecasts. The lowered outlook for company profits is illustrated in the bottom left graph. Higher levels of inflation can negatively impact the valuation of company earnings. Higher interest rates accompanying elevated inflation saps investor demand for equities as bonds become a more attractive alternative. The bottom right graph puts the current forecast of the price-to-earnings ratio in the third richest decile since 2000. Our observation is that equity investors have pinned their hopes on a quick deceleration in inflation and an acceleration of earnings growth. We share this optimism to a degree but point out that the Federal Reserve is far from declaring victory in the war on inflation, and further bouts of downside volatility should not be ruled out.
Global equity bourses followed the move lower in U.S. Equity Indexes in February. The S&P Global BMI ex-U.S. total return in February was -3.35%, with developed markets performing better at -2.59% and emerging market returns lower at -5.57%. The U.S. Dollar Index increased 2.7% in February, the first rise in five months, and deflated the return to investors with overseas holdings. Dollar volatility remains well above the past decade's average and is an important reason to hold international stocks as a hedge against shifting views in Central Bank policies.
Equity markets provided another reminder of the wide range of potential outcomes measured over a month. Incremental data points, which may provide important clues to the long-term outlook for stocks, are often amplified or extrapolated, causing anxiety and confusion for investors and volatility in stock prices. The challenges facing equity investors today are not minimal, but neither are the opportunities. As is the case in every market environment, future opportunities are less visible than immediate challenges, which makes focusing on long-term goals the key to success.
Notes & Disclosures
Index Returns – all shown in US dollars
All returns shown trailing 2/28/2023 for the period indicated. “YTD” refers to the total return as of prior-year end, while the other returns are annualized. 3-month and annualized returns are shown for:
- The S&P 500 index is comprised of large capitalized companies across many sectors and is generally regarded as representative of US stock market and is provided in this presentation in that regard only.
- The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance. The S&P 500 equal-weight index (S&P 500 EWI) series imposes equal weights on the index constituents included in the S&P 500 that are classified in the respective GICS® sector.
- The S&P 500 Growth Index is comprised of equities from the S&P 500 that exhibit strong growth characteristics and is weighted by market-capitalization.
- The S&P 500 Value Index is a market-capitalization weighted index comprising of equities from the S&P 500 that exhibit strong value characteristics such as book value to price ratio, cash flow to price ratio, sales to price ratio, and dividend yield.
- The Russell 3000 Index tracks the performance of 3000 U.S. corporations, determined by market-capitalization, and represents 98% of the investable equity market in the United States.
- The Russell Mid Cap Index measures the mid-cap segment performance of the U.S. equity market and is comprised of approximately 800 of the smallest securities based on current index membership and their market capitalization.
- The Russell 2000 Index is a market-capitalization weighted index that measures the performance of 2000 small-cap and mid-cap securities. The index was formulated to give investors an unbiased collection of the smallest tradable equities still meeting exchange listing requirements.
- The MSCI All Country World Index provides a measure of performance for the equity market throughout the world and is a free float-adjusted market capitalization weighted index.
- The MSCI EAFE Index is a market-capitalization weighted index and tracks the performance of small to large-cap equities in developed markets of Europe, Australasia, and the Far East.
- The MSCI Emerging Markets Index is a float-adjusted market-capitalization index that measures equity market performance in global emerging markets and cannot be purchased directly by investors.
- The S&P Global BMI sector indices are into sectors as defined by the widely used Global Industry Classification Standards (GICS) classifications. Each sector index comprises those companies included in the S&P Global BMI that are classified as members of respective GICS® sector. The S&P Global BMI Indices were introduced to provide a comprehensive benchmarking system for global equity investors. The S&P Global BMI is comprised of the S&P Emerging BMI and the S&P Developed BMI. It covers approximately 10,000 companies in 46 countries. To be considered for inclusion in the index, all listed stocks within the constituent country must have a float market capitalization of at least $100 million. For a country to be admitted, it must be politically stable and have legal property rights and procedures, among other criteria.
- The Barclay’s US Aggregate Index, a broad-based unmanaged bond index that is generally considered to be representative of the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
- The Bloomberg Barclay’s US Corporate High Yield Index, which covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Index performance used throughout is intended to illustrate historical market trends and performance. Indexes are managed and do not incur investment management fees. An investor is unable to invest in an index. Their performance does not reflect the expenses associated with the management of an actual portfolio. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. All investing involves risk including loss of principal. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Past performance is no guarantee of future results.
Key Indicators correspond to various macro-economic and rate-related data points that we consider impactful to equity markets.
- The US 10-Year Treasury Yield (%)/bps, is the return on investment for the U.S. government’s 10-year debt obligation and serves as a signal for investor confidence.
- SPDR Gold Trust Price ($), is an investment fund that reflects the performance on the price of a gold bullion, less the Trust’s expenses.
- West Texas Intermediate, which is an oil benchmark and the underlying asset in the New York Mercantile Exchange’s oil futures contract.
- CBOE Volatility Index (Level)/% Change, which uses price options on the S&P 500 to estimate the market's expectation of 30-day volatility.
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