Global equity markets started February with strong gains, only to take a step back during the final two weeks. Despite losing steam, the U.S. market still increased by 3.1%, with domestic small-cap stocks gaining an impressive 6.2%. Not far behind were developed-market foreign stocks, which increased 2.3% for the month. Underneath the surface, the U.S. market experienced a large rotation in leadership. The tech-heavy Nasdaq ended the month slightly in the red, while previously-shunned large domestic value stocks gained 6%. A somewhat simplified way to read these results is that the technology names which were favored during the middle of the pandemic are losing their luster as investors anticipate the economy reopening. Meanwhile, stocks that were ignored or heavily impacted by lockdowns are now being viewed more favorably by investors.
As mentioned, stocks performed well in February, but lost some ground near the end of the month. The cause of this late-February weakness was a rise in interest rates. For some time, there has been a disconnect between the equity and bond markets. The equity markets were priced for a recovery and the bond markets were priced for continued economic malaise. However, the bond markets now anticipate near-term economic normalization. When the bond market changes from anticipating malaise to anticipating growth, yields tend to rise. The yield on the ten-year U.S. government note has indeed risen and was 1.46% at the end of February.
As the rise in longer-term interest rates caught the attention of investors, Federal Reserve Chairman Powell testified before Congress and signaled he saw no urgency to raise rates nor did he see any threat of near-term inflation. Financial commentators viewed this testimony as a way to encourage markets to price in lower, long-term interest rates. The Chairman was seemingly ignored as yields continued to climb for the rest of the week. The overall bond market still declined by 1.4% during the month. Investors in shorter-term bonds, inflation-protected bonds, and mortgage-backed securities fared much better. Fortunately, we have been adding these kinds of bonds to client portfolios for more than a year now.
As the global economy emerges from this unprecedented pandemic, we continue to utilize economic and inflationary data to inform our portfolio construction. We look forward to providing continued guidance as we emerge into a post-pandemic world. Lastly, we are encouraged to hear that so many clients have begun receiving the Covid-19 vaccine. Take care and be safe. If we can be of help, please let us know.