The market volatility continues! After a positive January that recovered December losses, we’re now seeing another market pull-back that has the S&P 500 Index back below even for the month of February. But so far, this is all just in-line with what typical seasonality suggests.
Historically, the second half of February tends to be a rough patch. And specifically, the last week of February tends to have a low probability of gains. So what we are seeing right now is nearly textbook perfect, as far as seasonality suggests. What comes next? Again, seasonality would suggest we see more of a sideways and choppy market through March that doesn’t likely move too far out of the recent range it has been trading in. But once we get to April is when things tend to get good. Will that happen again this year? Hard to say, but I believe it can give us good guidance on what to be watching for.
One of the bigger negative factors we’re seeing at the moment is a rise in unemployment. It is not yet showing up in the public data, but it’s there. While many are aware of government layoffs influenced by DOGE (Department of Government Efficiency), we’re also seeing some big layoffs in the private sector as well from companies like Chase, Chevron, Starbucks, and Meta. These don’t seem to be related to DOGE actions, but they could give us a perfect storm that sets us up for a bigger market pullback. So we’ll keep watching.
To give a visual of the historic seasonality, I’m repeating my chart from last month. This shows what parts of the year tend to have strength and which tend to have weakness, based on the average of what happens in the first year after a presidential election. This chart covers the past 7 US election cycles, so there are many different market environments over that period. Even still, there tends to be a commonality in certain parts of the year.
Seasonality chart of the average S&P 500 movement over the first term of the past seven US elections (Source: Seasonax)
Our Shadowridge Long-Term Trend indicator has been positive since January 17th and remains positive even with February’s volatility. And while this factor is holding above its trend-line, it wouldn’t take much to see this go negative again.
Our Mid-Term Cycle indicator is back to negative as of February 21st and has struggled with its sense of direction for much of the month. It is now below the -200 line. A reversal is typically in the future from this point. We’re just not sure if that is in the next few days or weeks here. Only time will tell.
As of Wednesday night (February 26th, 2025), our Shadowridge Dashboard showed Positive to Negative market sectors as 4 to 7 with defensive areas of the market holding leadership and relative strength against the rest of the market.
All 10 RGB Bond Indexes are currently trending positive, above their 50-day Moving Average. The interesting shift is that Interest Rate sensitive sectors have been stronger than Economic sensitive ones over the past couple of weeks. If this trend continues, we may actually see traditional bonds as “the place to be” during a market sell-off. Still early to tell, but worth keeping an eye on this factor.
RGB Economic and Interest Rate Sensitive Bond sectors (Source: ShadowridgeData.com)
While interest rates are still an important factor, it doesn’t appear that the Federal Reserve will likely be making any changes in the near-ish future. Right now, the Fed Funds rate is not far off from the 2-year treasury yield (a good bell-weather for where rates should be). But that also makes me wonder if that will result in a stagnant bond market. If rates aren’t moving, then neither are bond prices. So again (and still), the bond market is offering little help with diversification.
Bottom Line: Market volatility in February was expected, as I mentioned last month. We’ve been reducing our stock market exposure a little to deal with it, but for now the major trends of the stock market are still up. So we’re getting ready to take advantage of a quick reversal once we get into March.
Stay safe out there!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.