Wall Street's three major indexes posted monthly declines in February after starting the year strong as investors predicted that the Federal Reserve would maintain its tight monetary policy for an extended period.
The Dow Jones went down by 4.19 percent in February. The S&P 500, a benchmark index that tracks shares in the top U.S. companies, posted a monthly loss of 2.61 percent. Meanwhile, the tech-leaning Nasdaq declined by 1.11 percent.
The benchmark indexes also declined on the last trading day of February. The Dow Jones closed at 32,656.7, losing 232.39 points or 0.71 percent. The S&P 500 ended at 3,970.15, falling by 12.09 points or 0.30 percent. Meanwhile, the Nasdaq lost 11.44 points or 0.1 percent to 11,455.54.
Goldman Sachs was the biggest weight in the blue-chip Dow, falling by 3.8 percent after chief executive officer David Solomon announced that the bank was considering "strategic alternatives" for its consumer side of the business.
Five of 11 major sectors within the S&P 500 index closed lower, with defensive utilities and consumer staples being the worst performers. In February, the information technology sector was the only S&P sector that finished higher.
Tech giant Meta gained 3.19 percent after it announced plans to create a novel top-level product category focusing on generative artificial intelligence.
Shares of retailer Target also surged by 1.01 percent after it reported better-than-expected sales in Q4 2022. However, Target cautioned investors on the possibility of a decline in earnings this year due to the uncertainty in the U.S. economy.
Meanwhile, Norwegian Cruise Line Holdings plummeted by 10.18 percent after the cruise operator predicted its profit this year would be lower than expected due to high fuel prices and labor costs.
The market predicted further monetary tightening by the Fed due to recent inflation data. Consumer confidence unexpectedly declined in February, per global research group the Conference Board. On the other hand, home prices declined in December 2022.
Previously, consumer spending in January also rose by 1.8 percent, its biggest increase in almost two years. In January, the U.S. added 517,000 payrolls, which indicated that the job market remained tight and could drive wage inflation.
"The market in many ways expected things to go south more quickly, forcing the Fed to pivot, or pause, or cut rates sooner than the Fed was saying."
Johan Grahn, Head ETF Market Strategist at Allianz Investment Management
Johan Grahn, head ETF market strategist at Allianz Investment Management, explained that the market had expected inflation to cool down faster and that the Fed would loosen its tight policy soon — leading to a big rally in January.
"The staying power of the Fed is much more determined and steadfast than the staying power of investors so it's back to the old mantra of do you really want to fight the Fed on this and in this case it is still a mistake to try and do that," Grahn said.
Interest rate to peak at 5.4%
The market expects the federal funds rate to peak by September at 5.4 percent, against the initial prediction of just over five percent. Bank of America Global Research even warned that the Fed could raise the benchmark rate to almost six percent.
The two-year Treasury yield, which usually moves in accordance with interest rate expectations, rose by 2.3 basis points to 4.816 percent.
The central bank will hold a rate-setting meeting on March 21 to 22. Most investors predict a 25-basis-point increase, just like the previous meeting, while a smaller percentage expects a 50-basis-point increase.
Chicago Fed President Austan Goolsbee advised the Fed to supplement data from the government and financial markets with real-time observations of economic conditions to design a "good" policy. Goolsbee also said the Fed should not rely on market reactions for its policy.