February 2023 - Market Update

Data Dashboard

Stock Market

The S&P 500 pulled back 2.2% in February, bringing YTD returns to 3.9%. For the second month in a row, Tech and Consumer stocks led the way. Developed Foreign and Emerging Market stocks still lead the YTD returns, up 6% and 12% respectively.

The VIX Index (a measure of expected volatility) is at 20, often seen as a measure of fear in the markets. The VIX was well above 20 for most of 2022. When the VIX is low, it means that traders selling insurance on stocks (using Put options) are willing to accept a lower premium. While this measurement is only a snapshot about CURRENT expectations, it gives us insight about the general mood of the markets.

VIX Index Chart

February Monthly Returns (by US Sector)

Bond Market

Bonds continue to lose value as rates rise and corporate fundamentals remain strained. The yield curve is at it’s steepest level of the cycle (2s10s spread at -89bp) and the long end of the curve increased 35bp during the month. The 20yr treasury is at 4.09% while the 6-month T-bill is now at 5.12%.

Yield spreads (excess yield above treasuries for taking credit risk) widened in February, consistent with the sentiment that higher rates in the economy will strain corporate balance sheets and will add additional stress to lower-quality borrowers.

Economics

February started off with a 25bp rate hike on the first day of the month, followed by a stellar Jobs number two days later showing a lower Unemployment Rate of 3.4% and higher Labor Force Participation. Non-Farm payrolls increased 517k in January compared to an expectation of 189k. The largest changes were in the private service sector, which is consistent with some of the larger pockets of inflationary pressure.

CPI Inflation came in at 6.4% (headline) and 5.6% (core) Y/Y for January. The Core Inflation print is the lowest inflation reading since December 2021, and marked the forth consecutive month of declining core inflation. The Fed’s preferred method of inflation, PCE, sits at 4.7%.

It is not clear yet what level of inflation will cause the Fed to stop the rate-raising campaign. There is a known and acknowledged lag in the effects on monetary policy. The current Fed Funds Futures curve shows another 0.75% in hikes before a pause, which would put the peak at 5.5% upper-bound. The curve shifted during the month as we saw strong economic data, starting February with the expectation that the peak would be around 5% and that the Fed would start cutting rates by July.

Tactical Updates

Our Tactical positioning remained fairly consistent during the month. The Tactical Stock portfolio maintained overweight positions in the Consumer Discretionary, Materials, and Information Technology sectors. In the ETF models, we are overweight foreign stocks in both developed and emerging markets. In the US, we have exposure tech, materials, and home builders.

As for Tactical Fixed Income portfolios, our bias is still very short-term in duration, with credit providing elevated yield.

General Client Considerations

IRS annual contribution limits for 401(k), 403(b), most 457 plans and Thrift Savings Plans (TSP) are increasing in 2023. Changing your elections at the start of the year can help you to spread out contributions evenly and ultimately maximize your tax advantaged retirement saving. In 2023, the contribution rate for these accounts is $22,500. This is an increase from the 2022 limit of $20,500.

Additionally, if you are 50 or older, the catchup contribution limit for 401(k), 403(b) and TSPs has increased from $6,500 to $7,500 in 2023. That means individuals who were born in 1973 or earlier can contribute up to $30,000 to these accounts. You do not have to wait until your 50th birthday to make catchup contributions - the contributions can start on January 1st of the year you turn 50.

With regard to IRAs and ROTH IRAs, the IRS changed the contribution limit from $6,000 to $6,500, and left the catch-up contribution at $1,000.

Many of you likely have a list of To Do’s for 2023 including doctor’s appointments and organizational tasks. We suggest you add financial checkup to the list and encourage you to setup some time with us to review your financial plan. We look forward to hearing from you!

Thanks,

The Friedenthal Financial Team

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