Trust Investment Management
U.S. equities closed lower in February as investors became more anxious about the negative impact tariffs, inflation, and cuts to government spending could have on the overall economy. While this was bad news for U.S. equities, fixed income rallied as yields fell. Stronger than expected economic data and dovish central banks in various regions overseas provided a tailwind to the international markets, which finished the month higher.
The Bureau of Economic Analysis released the latest figures for the Personal Consumption Expenditures (PCE) price index at the end of February. The PCE is the Federal Reserve’s preferred inflation gauge since it accounts for changes in consumer behavior and a broader range of expenditures than the Consumer Price Index. The PCE increased by 0.3% for an annual rate of 2.5%, as expected.
Overall, tariffs can lead to higher prices for a wide range of imported goods. However, unless tariffs are increased periodically, prices will likely be pushed up once rather than having a sustained impact on inflation. The Fed has a dual mandate (price stability, and maximum sustainable employment). With a solid labor market, the Fed has the flexibility to slow the pace of rate cuts. However, according to the CME Group, the probability of 3 rate cuts this year has increased to 66%. Investors now expect an additional rate cut due to concerns over a potential slowdown in the U.S. economy.
Consumer spending makes up approximately 70% of the U.S. gross domestic product (GDP). Economic uncertainty can cause consumers to postpone making purchases. With the unemployment rate at 4.0%, the labor market is in good shape. This should allow consumers to support retail spending and economic growth. If the economy begins to deteriorate, we believe that the Fed will be ready to lower rates at a more energetic pace.
After a long period of positive returns, it can come as a tremendous shock to be reminded that volatility includes stock prices going down as well as up. Falling markets and dramatic headlines can tempt individuals to abandon their long-term investment strategy. There can be a strong temptation to “do something” to stem any perceived losses. Yet it is often the case that staying on course proves to be the better path.
