February 2025 Market Review: Key Insights and Highlights
February 2025 Market Update: What You Need to Know
February 2025 has been an eventful month for the markets, with several key factors influencing the financial landscape. As I write this post after-market on the last day of February, it appears that the market will close out the month down by over 1%. The S&P 500® TR Index was down -2.86% for the month through yesterday before posting a return over 1.5% today. This likely brings the S&P 500®, which was down 0.15% year-to-date through yesterday, into slightly positive territory for the year.
Let me break down the main themes and events that have shaped the markets so far this year in a way that's easy to digest and understand.
Trade Wars and Tariffs
What's Happening?
To start the month, Trump announced tariffs on goods from Mexico, Canada, and China which were set to be imposed on February 4th. Those tariffs were paused and delayed and in the past week we learned they are now set to be imposed on March 4th.
The U.S. imposed heavy tariffs on goods from Mexico, Canada, and China. These tariffs include 25% on all goods from Mexico, 25% on goods from Canada (except energy products, which are at 10%), and 10% on all goods from China.
In response, Mexico, Canada, and China announced their own tariffs on U.S. goods, escalating the trade tensions.
Impact on the Economy:
Higher Prices: Tariffs can make imported goods more expensive, leading to higher prices for consumers. For example, if the U.S. imported $1.36 trillion in goods from these countries last year, a 19% average tariff could increase consumer prices by just over 1%.
In defending his tariff policies, Trump acknowledged that there might be some short-term pain for consumers but argued that it would be "worth the price" for the long-term benefits, such as boosting domestic manufacturing and reducing the trade deficit. He believes that tariffs can help protect American industries and jobs from unfair foreign competition.
Slower Growth: Trade wars can slow down economic growth as countries buy and sell less from each other. The U.S. exported roughly $760 billion in goods to these countries last year, and retaliatory tariffs could significantly reduce these exports.
If you are concerned about tariffs there are a few ways to “protect” or hedge your Portfolio. While I’m personally not a believer in overly concerning myself with uncertainty around unknown policy risks and rather believe that the earnings power of corporations drives their stocks higher over time, I do understand that those with a lower risk tolerance may want to reduce their volatility and potentially protect their portfolio in the short-term for tariff risks. One way you can do this is to include international assets and real assets (commodities, real estate, infrastructure, etc.) in your portfolio. These asset classes tend to be more highly correlated with moves higher in inflation and can protect against trade uncertainties.
Inflation and the Federal Reserve
January's Inflation Data:
Consumer prices rose more than expected in January, driven by increases in food and energy prices. The consumer price index (CPI) increased by 0.5% from the previous month and 3% from a year ago.
Core inflation, which excludes food and energy, also ticked higher to 3.3%.
Federal Reserve's (the “Fed”) Response:
Despite this higher inflation data, the Fed is not in a rush to change the current level of rates. They recently stopped cutting rates and are likely to keep rates unchanged for a while until they have confidence inflation remains under control.
The Fed's cautious approach is influenced by persistent inflation and a solid labor market.
Here is a quick reminder of what rate the Fed controls:
The Federal Reserve (the Fed) controls a specific interest rate called the "federal funds rate." This is the rate at which banks lend money to each other overnight. It's a very short-term rate, usually for just one night. When the Fed cuts this rate, it makes borrowing cheaper for banks. In turn, banks can offer lower interest rates on things like credit cards, car loans, and other short-term loans. The Federal Reserve might raise interest rates if inflation came in higher than expected to help cool down the economy and bring inflation back to its target level. Higher rates make borrowing more expensive, which can reduce spending and investment, thereby easing inflationary pressures.
Stock Market Leadership
Tech Stocks Losing Steam:
The "Magnificent 7" companies (Apple, Microsoft, Amazon, Alphabet, Meta, NVIDIA, Tesla) that have been dominating markets had a tough earnings season. Their performance has been lagging compared to the broader market.
These companies have been facing increased competition in the artificial intelligence (AI) arena and rising spending, which has raised concerns about their valuations.
The news about DeepSeek was announced on January 27, 2025. DeepSeek is a Chinese AI startup that released its latest AI models, which are said to be on par with or better than industry-leading models in the U.S. at a fraction of the cost. This announcement caused significant disruption in the AI sector, leading to a sharp decline in the stock prices of major tech companies, including a 17% drop in Nvidia's shares.
New Leaders Emerging:
We are experiencing a broadening out of markets. Other sectors like financials, health care, and real estate are showing strong earnings growth. For example, earnings for the S&P 493 (S&P 500 minus the Magnificent 7) are accelerating after a two-year lull.
This shift in leadership is a positive sign for a more balanced market, as it indicates that other sectors are contributing to market growth.
If you have your money with an advisor who has emphasized the importance of diversification, you will likely notice that their results may be stronger to start this year. This doesn’t make up for over a decade-long period where a very narrow, small subset of stocks drove stock returns, but there is a possibility that this could be the start of an inflection point.
European Markets on the Rise
Strong Performance:
European stocks have been outperforming U.S. stocks so far in 2025. The German DAX is up 13% this year, and the broader Stoxx 600 index is up 10%.
This performance is notable given the recent challenges faced by European economies, including trade uncertainties and low productivity.
This is a notable theme in the context of the past decade where the U.S. has dominated its international counterparts. Many financial advisors are cheering and applauding this trend, as diversification tends to perform well in these types of market environments and many advisors were extremely overweight international markets.
Reasons for Optimism in International Markets:
Positive economic surprises in Europe, such as stronger consumer spending and corporate profits, have boosted investor confidence.
The potential settlement of the Russia-Ukraine war could stabilize the region and reduce energy prices.
Key Market Trends to Continue to Watch
Mega-Cap Tech Stocks Lagging: After leading the market in 2024, mega-cap tech stocks are now underperforming. This shift indicates a broader market leadership, which is a healthy development for the sustainability of the bull market.
Stabilizing Treasury Yields: After rising sharply, U.S. Treasury yields have stabilized around 4.5%. This stability is influenced by contained inflation data and growth concerns.
European Equities Outperforming: European stocks are showing strong performance compared to U.S. stocks, driven by positive economic surprises and potential geopolitical stability.
Other dominant performers in February:
· Natural gas was up over 25%: A second wave of cold weather in mid-February led to increased demand for heating, which significantly boosted natural gas consumption vs. supplies. If you got your gas bill this month and gasped, you were not alone.
· Other commodities (Copper, Sugar, Tin, Industrials Metals): While these commodities each had specific drivers that led their prices to increase, broadly-speaking the gains can be attributed to supply constraints coupled with uncertainty around tariffs causing panic buying.
· Long-term government bonds: Saw gains in the month primarily due to declining yields. Concerns about slowing economic growth and geopolitical uncertainties led investors to seek the safety of long-term government bonds. As a result, the demand for these bonds increased, driving up their prices.
Conclusion
The first two months of 2025 have brought a mix of challenges and opportunities for investors. February was a stark difference from January and erased nearly all of January’s gains. Trade wars, inflation, and shifting market leadership are key themes to watch going forward.
Remember, the market is always changing, and staying adaptable is key to long-term success, but don’t forget your goals. The market is often uncertain and has unprecedented risks, but you can control these risks largely through an appropriate stock/bond mix given your goals. Don’t focus too much on near term uncertainty and ensure your portfolio is appropriately aligned to meet your future goals. If the probability of meeting your goals remains high and largely in-tact, you don’t need to constantly fret over the day-to-day noise in markets.
Sources:
Edward Jones: Weekly Market Wrap
JPMorgan: The Investment Implications of the Trade War
JPMorgan: Weekly Market Recap
Disclaimer:
This presentation is proprietary and should not be shared with parties, used, or re-created without prior written approval from Actively Passive Dad. The presentation and the data herein is copyrighted by Actively Passive Dad.
The information provided in this blog post reflects my personal opinions and does not represent the views or opinions of my employer. This content is for informational purposes only and should not be considered as investment advice. Such views are subject to change at any point without notice. The information in this blog post should not be considered investment advice or a recommendation to buy or sell any types of securities. Readers are encouraged to conduct their own research and consult with a financial advisor before making any investment decisions. Some of the information provided has been obtained from third party sources believed to be reliable, but such information is not guaranteed. I have not considered the investment objective, financial situation, or needs of any individual investor. There is a risk of loss from an investment in securities, including the loss of principal. Different types of investment involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable or a particular investor’s financial situation or risk tolerance. Any forward-looking statements, opinions, or forecasts are based on assumptions and actual results may vary. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision. Past performance does not indicate future results.