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February Economic Update

Market Summary

Rising bond yields, elevated inflation, policy shifts from the Federal Reserve, and tensions on the Ukraine border unnerved the stock market in January to begin the year. The Dow Jones Industrial Average slipped 3.32%, while the S&P 500 fell 5.26% and the tech-heavy Nasdaq was impacted the most, pulling back 8.98%. (1)

The Federal Reserve & Interest Rates

Anxiety about the Federal Reserve’s pivot from its accommodative monetary policy toward monetary normalization hung over the market all month. The first update that rattled the markets was the likelihood of an interest rate increase in March, which would be sooner than many had expected. The second update that upset investors was news that the Fed was considering not only tapering its bond purchases, but also selling bonds it currently holds into the market, which was a step that had not been widely anticipated any time soon.

As investors saw in January, these high-multiple stocks can come under pressure as bond yields trend higher. The reason for this is twofold. First, when interest rates tick higher, it’s more difficult to forecast future earnings. Second, higher interest rates may increase a company’s borrowing expenses.

Interest Rates & Tapering Bond Purchases

Gross Domestic Product, which is the rate of economic expansion, exceeded economists’ expectations in the fourth quarter, rising 6.9% which was triple the growth rate of the previous quarter. While the headline number was strong, two concerns emerged: Much of the growth was due to inventory build-up, and the price index for personal consumption expenditures (an inflation measure) accelerated from the third quarter, climbing 6.5%. (2)

Durable goods orders, which are often a sign of economic expansion or contraction, declined 0.9%, which likely reflects the impact of the Omicron surge. Retail sales declined by 1.9%, which was also likely due the spread of Omicron, in addition to early consumer holiday buying in response to possible inventory shortages which dampened spending in December. (3)

Looking ahead...