Equities

The U.S. equity markets exhibited strong performance in February, with the S&P 500 advancing 2.7% and the Russell 2000 gaining 2.6%. International markets also posted solid returns, as the MSCI EAFE Index increased by 5.2%, surpassing the 1.7% gain recorded in emerging markets (MSCI EM). Market sentiment remained positive, supported by stable monetary policy, resilient economic data, and investor confidence, despite ongoing political and trade uncertainties.

Despite policy shifts, market resilience remained evident. Investor optimism was bolstered by a 2.3% annualized GDP growth rate in the fourth quarter of 2024, albeit lower than the previous quarter’s 3.1%. Consumer spending, a key driver of economic activity, accelerated to 4.2%, marking its highest level since early 2023. However, this strength was partially offset by a 5.6% decline in business investment, reflecting corporate caution.

Fixed Income

Fixed income markets also delivered positive returns in February, with the Bloomberg U.S. Aggregate Bond Index increasing by 0.5%. Interest rate expectations and inflation data contributed to notable intramonth volatility in the bond market. Early in February, Treasury yields spiked, with the 10-year Treasury yield briefly exceeding 4.80%, driven by stronger-than-anticipated economic data and diminished expectations of further Federal Reserve rate cuts. However, mid-month inflation data provided some relief, as CPI readings were slightly below forecasts. This led to a reversal in yields, culminating in a bond market rally in the final week of the month, spurred by a shift toward safe-haven assets amid concerns regarding AI-driven volatility in the technology sector.

At its February meeting, the Federal Reserve opted to maintain interest rates at their current level, following a cumulative 100-basis-point (1.0%) reduction over the prior three meetings. Fed Chair Jay Powell underscored a measured approach to future policy adjustments, indicating that additional rate cuts would be contingent upon further progress in inflation reduction or signs of labor market weakness. As of month-end, market expectations suggested two additional rate cuts in 2025.

Employment and Inflation

The labor market remained robust, with February’s nonfarm payrolls adding 256,000 jobs, significantly surpassing the consensus estimate of 164,000. The unemployment rate edged lower to 4.1%, remaining within the stable range observed since mid-2024. Wage growth remained solid at 3.9% year-over-year, providing continued support for consumer spending.

Inflation remained a central focus for both markets and policymakers. Headline CPI increased by 0.4% in February, representing its fastest monthly gain since March 2024. Energy prices were a key contributor to this rise, climbing 2.6% over the month. On an annual basis, CPI inflation reached 2.9%, the highest level since July. However, markets found some reassurance in core inflation, which increased by 3.2% year-over-year, slightly below expectations. A continued deceleration in shelter costs offered further indications that inflationary pressures may be easing, potentially creating conditions conducive to additional Federal Reserve rate cuts later in the year.

Real Estate

Housing affordability remained a significant challenge, with home prices continuing to outpace income levels. The National Association of Realtors Home Affordability Index showed only marginal improvement from its near-record low in late 2023. While the index rose slightly above 100, it remained well below its historical average of 138, indicating that median-income households continue to face affordability constraints.

In 2024, existing home prices appreciated by 4.7%, a marked slowdown compared to the substantial gains observed between 2021 and 2023. This moderation in price growth was largely attributed to elevated mortgage rates, which stood at approximately 7.2% at the beginning of 2025. Looking ahead, analysts project a modest 1.2% increase in home prices for 2025, though with a broad confidence interval suggesting the potential for either slight appreciation or minor declines.

Historically, the correlation between housing prices and financial markets has been limited. However, bond markets have demonstrated a weak negative correlation with home prices, as Treasury yields tend to decline during periods of subdued housing price growth. Given the potential for home price stagnation or declines, investors with significant real estate exposure may consider reallocating portions of their portfolios toward fixed income assets as a strategic hedge.