Markets leap forward in February
The market rally continued into February in equities, with resilient economic data and relatively strong earnings reports fueling the S&P 500 Index to new record highs in February, gaining 6.9% for the month. Both the Nasdaq and S&P 500 Index had their best February since 2015. The Japanese market also continued to rally, with the Nikkei 225 Index reaching a new all-time high for the first time in over 30 years. Canada also had some encouraging news on the inflation front, helping the TSX rise by 2.2% in February.
By contrast, fixed income markets were broadly lower, with the Bloomberg Global Aggregate index losing -0.74% in February, as the overly ambitious expectations for rate cuts were pared back, causing yields to rise in response.
The NEI perspective
Rate cut expectations have been pared back despite global inflation continue to moderate. Many market participants that originally assumed aggressive rate cutting throughout the year have had to reign in their expectations, though the timeline for the first rate cuts are differing by region.
Strong macro environment is providing support for U.S. equities in the near term as the U.S. economy continues to outshine its developed peers with a strong GDP forecast for the year. The combination of falling inflation and rising economic output is positive for risk assets generally.
Small caps have lagged over the last few years due to their increasing debt services costs in a higher rate environment. However, small caps are now trading at attractive valuations with a wide discount to large caps that could provide an attractive entry point for high quality names when rates begin to fall.