Investment Commentary | February 2025

For a month that is supposed to be full of love, February treated US equity investors like a bad ex. The large cap US S&P 500 ended down 1.30%, after hitting new highs twice during the month.

US Equity Markets Struggle Amid Tariffs, Layoffs, and Growth Concerns

Ongoing growth concerns pressured the market and tested investor resolve, as tariffs and trade wars continued to capture the attention of investors. The deadline for 25% tariffs on Mexico and Canada is fast approaching, Europe is now being added to the 25% list, and China faces an additional 10% in tariffs. Beyond the economic uncertainty surrounding tariffs, concerns are also growing over deportations and layoffs. In the short term, tariffs will raise inflation, potentially forcing the Federal Reserve (Fed) to keep rates high. Retaliatory tariffs will slow growth and put pressure on S&P 500 returns. S&P 500 companies generate roughly 40% of their revenue outside the US.

Labor Market Pressures: Deportations, Layoffs, and Economic Uncertainty

Deportations are not occurring at the pace the current administration would prefer. Still, the rate remains brisk, creating a chilling effect on workers in certain industries that is already beginning to affect production. At the same time, layoffs of Federal workers are accelerating, adding to economic uncertainty as unemployment rises and consumption slows in areas with an above-average share of Federal employees.

The economy will likely face a skills mismatch, with low-skilled, low-paid workers being removed from the country while higher-skilled, higher-paid workers face unemployment. The combined effect will likely increase unemployment and slow growth — conditions that would typically lead the Fed to lower interest rates. However, with tariffs in play, that may not be the case this time.

Sector Performance Shines for Consumer Staples While Tech Stumbles

From a sector standpoint, returns for the month were led by Consumer Staples, Financials, and Health Care. On the downside, Consumer Discretionary, Communication Services, and Information Technology saw the steepest declines, as consumers tightened spending, and investors questioned the pace of AI-related investments.

Small-Cap and Mid-Cap Stocks Take a Bigger Hit

Smaller companies fared worse than their larger peers, with the S&P MidCap 400 and S&P SmallCap 600 indexes down 4.35% and 5.71% for the month. The same concerns weighing on large-cap companies are also affecting smaller companies.

The combination of higher interest rates driven by persistent or rising inflation, along with slower growth, is fueling fear in the markets. Stagflation — a period of low growth and high inflation — was last experienced by US investors in the 1970s. While the term resurfaces from time to time, the current environment presents the highest likelihood of stagflation in decades.

Global Markets Outperform the US in February

Foreign markets offered a reprieve from the US, as both the S&P Developed Markets Ex-US BMI and S&P Emerging Markets BMI posted positive returns, ending the month up 2.16% and 2.03%, respectively. Trade wars benefit no one, but the combined threat of tariffs and shifts in geopolitical leadership has prompted leaders in the EU, Canada, and Mexico to begin the process of reducing their reliance on the US. The focus in these regions will now shift toward military spending, domestic production, and local consumption. Slower growth across much of the world outside the US has led to interest rate cuts, resulting in looser monetary policy relative to the US. As these countries ramp up spending to offset changes in their relationship with the US, more investment opportunities should emerge.

Fixed Income Update: Falling Rates and the Debt Ceiling Debate

Fixed Income posted a gain of 1.67% in February, aided by declining longer-term interest rates. However, this drop in rates may prove temporary. Since the debt ceiling has not been raised, the government has been unable to borrow additional funds. As bills move through the House and Senate, an increase in the debt ceiling is all but certain. The current target is a $4 trillion increase. Once approved, the government will be able to issue new debt to fund additional spending, which is likely to push rates higher as investors demand greater yields to compensate for increased risk.

For short-term rates, the Fed faces a challenging environment if growth slows while inflation remains elevated. The Fed operates under a dual mandate of maintaining low inflation and promoting full employment. If these mandates come into conflict in the months ahead, it will be interesting to see which the Fed prioritizes — fighting inflation or supporting employment. The policy path they choose will have implications for markets worldwide.

Gold Nears Historic $3,000 Mark and What It Means for Investors

Gold and silver paused after a blistering start to the year. The S&P GSCI Precious Metals index rose 0.49% for the month. Gold came just shy of $3,000 per ounce, reaching a high of $2,957 late in the month before pulling back into month-end. Global tailwinds for precious metals remain in place, although the $3,000 level could act as resistance. Rising long-term rates could also cap further price gains. However, once gold crosses the psychologically important $3,000 per ounce mark, it could trigger further upside, with $3,000 potentially acting as a new support level.

While February may have broken investors’ hearts, the growth of spring is just around the corner. Uncertainty remains in the forecast and storms will come, but if markets take their cue from Mother Nature, growth will eventually return.