After a relatively strong January, global stock markets gave back a portion of their gains in February. Stubbornly strong inflation and the potential for more interest rate hikes from the Federal Reserve appear to be the primary reasons for the recent declines.
However, up to this point, this pullback appears to be “a pause that refreshes” rather than the start of a larger decline. Longer term measures of market health, which surpassed key thresholds in January, have not been breached. Additionally, investors have continued to favor more aggressive areas of the market, such as small cap stocks and economically sensitive sectors, while lower volatility or defensive sectors have lagged. That is not typically what we see before a larger decline.
The stronger underlying market health can help support the market. At the same time, upside for the overall market may be limited by the prospects for a recession, persistently high inflation, and a relatively weak earnings outlook. The market has moved sideways, within a range, for several months now; that may continue for several more months before a more decisive move is made. However, opportunities exist beyond the broad indices, such as in international markets, or in particular sectors and stocks.