February 2023 – Market reaches first resistance zone and takes a breath

SFRR closes the month at -0.80% (+7.83% YTD), SFPG at +1.66% (+9.85% YTD) and SFQS at -0.56% (+10.91% YTD).

February started with rises in indices, that remained sideways until the middle of the month, falling into negative territory in the second half. S&P 500 posts -2.61%, Nasdaq 100 -0.49%, and Russell 2000 -1.81%. Our funds substantially outperformed markets.

Hedging strategies generated a positive contribution of 0.21% in Real Return and +0.44% in Prudent Growth. In Quality Stocks the USD exposure contributed +1.9% in the month.

Equity strategies also outperformed markets: Momentum: +0.5%, Growth: +3.21%, Quality: -0.53%.

Market technical structure improved considerably during January, although in February it has taken a pause when a resistance level was reached, and better visibility on growth, inflation and monetary policy is needed to continue rising.

The Federal Reserve raised rates by a quarter point (0.25%) to 4.75%. It has started easing rate hikes but there are still no messages pointing to a pause. The European Central Bank raised rates by half a point (0.50%) to 3%. Although the ECB’s tone is harsher, we expect it will not go beyond narrowing the differential with US rates.

On February 14, January inflation data was released (6.4% yoy vs. the previous 6.5% and 6.2% estimated). A declining inflation, although still at higher than expected levels, leading to renewed expectations of interest rate hikes and falls in bonds.

The strength of the inflation component related to services, pushed by the shortage of supply in the labour market in this sector, is especially noteworthy, and it is the area on which Jerome Powell, chairman of the Fed, places most emphasis in his interventions. Until this inflationary pressure eases, the Fed’s tone will remain restrictive.

At the date of publication of this commentary, news of the stock market collapse of several US banks (notably Silicon Valley Bank and Signature Bank) and the solution proposed jointly by the Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) had already emerged. The conclusion has been that 100% of deposits are guaranteed and a liquidity line will be given to any relevant financial institution that requests it, for which treasury bonds (and other assets eligible for the Fed’s balance sheet) will be used as collateral, avoiding the need to sell them on the market and materializing unrealized losses. We understand that this measure effectively contains the risk of contagion to the rest of the financial system and consolidates a complete protection of deposits by authorities: an exceptional measure, when systematically used, becomes a rule. On the other hand, any other solution would have resulted in a systemic crisis.

Despite the turbulence, markets remain within the same sideways band since May last year. While lower than expected growth will lead to a more accommodative monetary policy, good corporate results will keep inflationary pressure high and monetary policy tighter. As a consequence, stock indices are having a hard time finding their direction, although a better technical structure can be seen in the growth factor vs. the value factor.