Why have the markets have been so volatile?

The S&P 500 experienced notable volatility in February 2025, influenced by a combination of economic indicators, corporate earnings reports, and geopolitical developments.

Market Performance

In February, the S&P 500 recorded a 1.3% decline, marking its most significant monthly drop since December 2024. The Nasdaq Composite also faced challenges, experiencing its largest monthly decline since April 2024. Despite these setbacks, the Dow Jones Industrial Average managed to close February on a positive note, jumping 601 points on the last trading day of the month.

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Volatility Indicators

The CBOE Volatility Index (VIX), often referred to as the "fear index," spiked above 20 during February, indicating heightened market uncertainty.

Additionally, GARCH (Generalized Autoregressive Conditional Heteroskedasticity) models predicted an increase in volatility, with forecasts rising from 14.12% to 15.57% by the end of the month.

Contributing Factors

Several elements contributed to the market's fluctuations:

• Economic Indicators: Declining retail sales, weakening business surveys, and reduced consumer confidence signaled potential slowdowns in economic activity.
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• Corporate Earnings: The earnings season revealed a higher rate of companies missing profit estimates, particularly among smaller firms struggling with high interest rates and inflation.
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• Geopolitical Developments: The announcement of 25% tariffs on European automobiles and new levies on Mexico and Canada by President Trump added to investor concerns, contributing to market volatility.

Sector Performance

Despite the overall decline, certain sectors demonstrated resilience. The Low Volatility index secured a 4.7% increase, narrowly surpassing the Low Volatility High Dividend index. Additionally, the S&P 500 Equal Weight index outperformed the benchmark, aligning with historical patterns during periods when mega-cap stocks underperform.

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‍Outlook

Historically, February tends to be a weaker month for U.S. stocks, especially in post-election years. However, this doesn't necessarily spell trouble for the months ahead.

March and April have often delivered positive returns, and with current low market expectations, there is potential for stocks to rebound. Investors remain cautious, awaiting more economic data and clarity on policy directions.

In conclusion, while February presented challenges for the S&P 500, a combination of historical trends and potential policy clarifications may pave the way for stabilization and growth in the coming months.

While volatility may persist in the short term, historical trends suggest that election years and early-stage rate cut cycles often support stock market gains. If economic growth remains intact and monetary policy remains accommodative, the S&P 500 could see moderate to strong gains by year-end 2025. However, risks remain, particularly around inflation, interest rates, and global uncertainties.

For long-term investors, maintaining a diversified portfolio and staying invested through market fluctuations remains the best strategy.