Major U.S. Stock Indexes

After a strong January to start the year, major U.S. equity indexes traded lower in February. Here’s how major U.S. stock indexes fared: The S&P 500 declined by 1.42%. The Nasdaq 100 fell by 2.76%. The Dow Jones Industrial Average decreased by 1.58%.

Tariff Talk

The ongoing tariff talks have been a daily topic of discussion. Here is where we are at the start of the month: President Trump’s proposed tariffs on Mexico and Canada are set to roll out on March 4th. Tariffs on aluminum and steel imports are scheduled for March 12th. An additional 10% tariff on China is expected to begin on March 4th as well (on top of the existing 10% tariff). The additional tariff is said to be due to insufficient progress on fentanyl entering the U.S. from China. Overall, markets held up well for the majority of February, even with ongoing tariff uncertainty. The second half of the month (especially the final week) is where we saw some volatility. However, from a seasonality perspective, this is to be expected.

CPI and PPI Show Inflation Warmth

January inflation metrics released in February ran warm overall but ended on a positive note: The January Consumer Price Index (CPI) showed a monthly increase of 0.5%, exceeding expectations of 0.3%, resulting in a year-over-year inflation rate of 3.0%, up from 2.9% in December. Initially, markets reacted negatively to the data suggesting the Federal Reserve may maintain a neutral stance longer, but stock indexes recovered by the end of the trading week of the data release.

The January Producer Price Index (PPI) rose 0.4% for the month and 3.5% year-over-year, surpassing estimates of 0.3% and 3.2% — a hotter than expected reading. Positive factors in the PPI data release were seen as likely to positively influence the then-

upcoming data release of the Core Personal Consumption Expenditures (PCE) index. Core PCE Offers Positive Data Markets needed some soothing or something to grab onto on the last trading day of the month, and they got just that in the form of Core PCE. Data showed a 0.3% monthly rise and a 2.6% annual rise — both in line with expectations and a step down from the previous month’s upwardly revised reading of 2.9%. This most recent piece of inflation data (and the Fed’s favorite measure) was the lowest reading in seven months. This data was a solid way to finish the month.

Federal Reserve (Fed) Outlook

There was no Fed meeting in February, but we did get the minutes from the January meeting. Minutes showed concerns over the potential impacts of tariffs on inflation. As a result, the tone was one of rate cuts being on hold. As of the last trading day of February, Fed Funds futures markets are pricing a 93.0% probability that the Fed will leave rates unchanged at the March meeting. June Fed meeting probabilities show only an 18.4% chance of an unchanged decision by the Fed, with June currently being talked about as the month for rate cuts.

Labor Market

The nonfarm payrolls report for January shows a disappointing increase of only 143,000 jobs, below the Dow Jones forecast of 169,000. This slow growth was partly due to California wildfires and employers’ uncertainty about the policies of the new administration. On the bright side, December and November payroll figures were revised upward. While the headline jobs number fell short, the underlying data remains strong. In addition, the unemployment rate has dropped to 4.0%, and hourly wages increased.

Consumer Health & Mood

January retail sales data showed some post-holiday hangovers, with sales declining by 0.9% for the month versus Dow Jones estimates for a 0.2% decline. Severe weather may have been partially responsible for the weak number. University of Michigan’s consumer sentiment data dropped to a 15-month low amid tariff uncertainty. Consumer confidence data also fell to its lowest reading since 2021.

Spring Ahead

The financial markets absorbed the weight of nearly constant tariff talk and the uncertainties that accompanied it well for most of February. However, volatility presented itself as the month progressed to a close. The winter of tariff uncertainty could persist for a while longer — much like how Punxsutawney Phil saw his shadow. It is always darkest before dawn, and spring is right around the corner! We will see how it all plays out while remaining focused on the core principles of long-term investing.

As always, if you would like to discuss the current market outlook and explore investment strategies based on your objectives or market developments, please feel free to contact me. I am always here as a resource for you!