February 2025 - Market Update

Data Dashboard

Stock Market

Consumer Staples & Real Estate were the best performing sectors for the month. Investors are leaning more towards traditionally defensive sectors in 2025.

US MidCap & SmallCap stocks lost 5.35% and 4.35% respectively, as Developed and Emerging market stocks continued their outperformance YTD. The tech-heavy NASDAQ composite was down almost 4% for the month. The "Magnificent 7" stocks — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla, have had mixed performance in 2025. Meta is the only one that has outperformed the S&P 500. Concerns over slowing earnings growth and increased AI spending have affected the performance of these stocks.

Tesla, however, has seen a much more dramatic decline amid reports of slowing Europe sales, impact of Mexico tariffs and the narrowing gap to its competitors in the EV space. As of Feb 28, it is down almost 40% from its 17th Dec high.

The stock market has been bracing for the impact of US tariffs on global imports & subsequent retaliatory tariffs from Mexico, Canada and China.

February Monthly Returns (by US Sector)

Bond Market

Bonds rose as longer term yields dropped across the board in February. High yield corporate bond spreads widened to 2.80% from 2.61% at the end of January.

The treasury yield curve has dis-inverted and is now relatively flat. Over the past year, short-term yields have decreased, while long-term yields have experienced a slight increase. As a result, there's not much of an argument for maintaining short-term investments over intermediate term treasuries. Long term treasuries are still not getting a higher yield spread to justify the associated duration risk.

The breakeven rate for 2-year Treasury Inflation-Protected-Securities (TIPS) rose further and ending at 3.19%, from 2.94% at the end of January. TIPS are pricing in higher inflation expectations, given the effect of import tariffs, and retaliatory tariffs on exports.

Economics

The unemployment rate dropped further down to 4%, while the Core PCE reading came in at 2.65%. Swaps markets are pricing in about 3 Fed rate cuts (25bps each) in 2025.

The US ISM Manufacturing PMI indicator for both January and February marked the first expansion in over two years. This was driven by a sharp rebound in new orders in January, which could be an indicator of companies loading up on inventory, in anticipation of tariffs going into effect. For February, PMI was driven by higher supplier deliveries, consistent with longer delivery times & possible supply chain disruptions.

Retail sales for January dropped 0.9%, signaling a weakening US consumer. Investors should watch out for the February readings, which come out the third week of March, as it could provide valuable insights going into the Federal Reserve's March 19 meeting.

The VIX Index, also referred to as the market's "fear gauge", rose in February, ending at 19.63%

February Economic Dashboard

Tactical Trades

The equal sector weighting adjustment in our tactical portfolio that we implemented in January has been effective, particularly during this period when the Technology sector is experiencing a pullback.

We added some global exposure to our Tactical ETF portfolio, in February.

In our Low-Vol Tactical portfolio, we increased the duration exposure and added mortgage-backed securities, while reducing credit exposure through convertible securities.

General Client Considerations

2025 IRS annual contribution limits for 401(k), 403(b), most 457 plans and Thrift Savings Plans (TSP) increased from $23,000 to $23,500. Changing your elections at the beginning of the year can help spread out contributions evenly, and ultimately maximize your tax advantaged retirement savings. If you are participating in a company sponsored retirement plan and maxing out your contribution, please reach out to your HR department to ensure your contribution amount has been updated to reflect the new maximums.

Additionally, if you are 50 or older, the catchup contribution limit for 401(k), 403(b) and TSPs has remained the same at $7,500. If you are born in 1975 or earlier, you can contribute up to $31,000 to these accounts in 2025. 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.

Starting 2025, if you are aged between 60-63, you can contribute up to a total of $34,750 (eligible for a higher catch-up contribution due to SECURE 2.0).

For more information, check out our newsletter on 2025 Retirement Account Limits.

As always, reach out with any questions or concerns.

Thanks,

The Friedenthal Financial Team