Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist
The beginning of February saw an acceleration of the market decline which had begun late the prior month. Concerns over rising interest rates and some profit taking in the high-flying Technology sector, paced the initial declines. Yields on benchmark 10Y US Treasuries hit a four-year high, and volatility both implied (VIX) and observed rose dramatically. However, the passage of another stopgap spending bill in the US along with reassuring comments from central bankers and the IMF (and some amount of FOMO) appeared to assuage investor fears, and the long-lived bull market continued its upward climb by mid-month. Given the market gyrations, there were some concerns over the influence of volatility-linked investment products, but the impacts were mostly confined to the liquidation of a few ETNs and a general realization of the weakness of the VIX as a gauge of market volatility. Economic growth globally continued to be good, not great, while signs of higher inflation began to manifest. Employment metrics in the US were robust which gave support to the US Fed’s plan for several further rate hikes this year.
Although a robust rally in the second half of the month cut losses, the Russell 3000 Index finished the month down with a return of -3.7%. Despite the market reversal, the Technology sector (+0.2%) continued its leadership and was the only positive sector for the month. Energy (-11.2%) was dramatically lower, and defensive/yield categories such as Consumer Staples (-7.5%), Materials (-5.7%), and Utilities (-5.5%) lead decliners. Size was not a significant factor as US small cap stocks were only incrementally worse than large caps with the Russell 2000 Index returning -3.9% and the Russell 1000 Index returning -3.7%. Outside of the US, returns were modestly more negative. The developed market MSCI World ex USA Index returned -4.8%, and the developing market MSCI Emerging Markets Index returned -4.6%.