Markets Drop in February but Stay Up Year-to-Date, While Fed Eyes Rate Cuts
Aah, spring! It’s just around the corner, and already the days are getting longer and brighter. That covers the weather. As for the financial markets, brighter days are not what we’ve been seeing for the most part as we head into March. Although the stock market managed to end January on an up note despite increased volatility, the downs ultimately beat the ups in February, and all three major indexes ended the month with losses. The S&P 500 dropped by 1.4%, the Dow Jones Industrial Average slid by 1.6%, and the Nasdaq ended February down 3.5%.1
Ultimately, though, the market overall was still up year-to-date at the end of February by about 1.5%. If you annualize that, it means the market is on track pro rata for 9% growth for the year, which is roughly its historical average. What’s more, the kind of volatility we’ve been seeing isn’t really surprising considering we have a new administration in the White House and a president known for taking actions that can move the investor confidence needle significantly in either direction.
In addition to the volatility caused by the president’s tariff plans and other policy concerns, the market’s increasing lack of stability lately is also due in part to shifting fortunes within its different sectors. For over two years now, technology companies have dominated the market and accounted for a large percentage of its growth. That’s starting to change, however, as some tech stocks start to sputter and new sectors gain strength.2 Ultimately, that’s good news since, just as you want your own portfolio to be diversified, it’s always best when the market itself is also diversified.
Your Portfolios
Of course, for most of you, diversification means a diversified portfolio of individual bonds and bond-like instruments because you’re investing for income first and growth second. And while the ups and downs of the stock market certainly impact all investors to some degree by influencing other factors, those of you in our most conservative bond portfolios are well-insulated against Wall Street’s volatility. As you’ll see from your latest statement, those portfolios are up by about 3% on average for the year, depending on your individual holdings. Your values may be up slightly more or less in the range of 2-4% depending on your specific allocation, but 3% is the median average.
In other words, you’re still in great shape. Part of the reason is that the market, despite its increased volatility, is still up year-to-date, but it’s also because interest rates came down a bit in February. The interest rate on the 10-year government bond started the month at about 4.5% and dropped to 4.2% by the end.3 When long-term interest rates go down, of course, bond values go up. And while it always feels better to see your holdings increasing in value rather than decreasing, the most important thing to remember is that any value fluctuations up or down when you’re investing for income are largely irrelevant because your interest-and-dividend return is steady either way.
Of course, the biggest question now as far as the markets go is what’s next? With the president’s tariff plan moving forward, the tech boom slowing, and some new economic indicators pointing once again toward the possibility of a slowdown, can Wall Street stay on track for that 9% growth rate, or was February’s pullback a sign of more shrinkage to come?
Well, no one has a crystal ball, of course, but, as I pointed out in last month’s newsletter, no matter what happens, it’s important to keep things in perspective. Once again, the volatility we’ve seen so far is not unusual. And even if it does increase and the markets start to struggle, remember to stay focused on your goals and resist the urge to make strategic changes based on short-term market fluctuations. That’s never a good idea. Again, one of the best things about the income model is that you don’t need to stress out when markets get choppy because your strategy is designed to keep you on course toward your goals even in rough seas!
Fed is Ready
Keep in mind, too, that if a slowdown does occur, the Federal Reserve is in good shape to address it because they’ve spent most of the last few years raising short-term interest rates – and they still have plenty of ammo. Although the Fed came into 2025 signaling that they probably wouldn’t lower rates much, if at all, this year, that has already changed. The Fed now says that two or three rate cuts are likely this year, with the first probably coming in June.4
The point is, because the Fed spent so long raising short-term rates – which now stand at a range of 4.25-4.5% – they are well positioned to help combat a potential economic slowdown by lowering rates again. As always, of course, the timing will be crucial. The idea is to not wait until the economy is sliding into a recession to start cutting but to make strategic cuts that prevent a recession. The Fed knows this, and they are well prepared and are watching all economic indicators closely.
As for now, the economy is still stable, the markets are still in the black, and most investors are still in good shape. And, of course, spring is almost here – which is always the best news of all at this time of year!
As always, if you have any questions, feel free to contact our office at any time!
Sources:
1 https://www.cnbc.com/2025/02/27/stock-market-today-live-updates.html
2 https://www.investopedia.com/dow-jones-today-02272025-11687427
3 https://www.marketwatch.com/investing/bond/tmubmusd10y?countrycode=bx
4 https://www.forbes.com/sites/simonmoore/2025/03/03/heres-the-feds-remaining-2025-meeting-schedule-and-the-outlook-for-interest-rates/
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