By Ken Sweet
NEW YORK -- After two months of trading, the stock market is back where it started.
The Standard & Poor's 500 index rose 4.3% in February, the biggest gain since October 2013, helped by strong corporate earnings and a Federal Reserve that seems to have Wall Street's back at every turn. But the rise in February must be taken in the context that investors spent the month making up the ground they lost in January.
"February looked a lot like January, just moving in the opposite direction," said Scott Clemons, chief investment strategist with Brown Brothers Harriman Wealth Management.Numbers-wise, the stock market is basically where it was on Jan. 1, but it's a lot more defensive than it was two months ago. Utilities and health care stocks -- two traditional "safe" places for investors, because of their low volatility and higher-than-average dividends -- are the biggest gainers so far this year. Utilities are up 5.7% in 2014 and health care is up 6.6%. Investor caution was also evident in the bond market, which has done reasonably well in the last two months. The yield on the benchmark U.S. 10-year Treasury note has fallen from 2.97% to 2.65% in the last two months, as investors returned to the relative safety of government debt. The Barclays U.S. Aggregate bond index, which tracks a broad mix of corporate and government bonds, is up 1.6% this year. "The sentiment now is, 'Bonds may not be as bad as I originally thought,' " said Michael Fredericks, a portfolio manager of the Multi-Asset Income Fund at Blackrock. February's rise came in spite of several economic reports that showed the U.S. economy slowed in the previous month. It started with the January jobs report, which showed employers only created 113,000 jobs that month. It was far fewer than economists had expected. Other economic reports told a similar story. Consumer confidence, manufacturing and the housing market all fell sharply in January. Investors blamed the weather, and rightly so. Many companies, particularly retailers, said winter storms of the past two months dramatically affected their business. Macy's (M - Get Report) said that at one time in January, 30% of its stores were closed because of inclement weather. Home Depot (HD - Get Report) had a similar story. "We don't like to use weather as an excuse, but we think we probably lost $100 million in the month of January," Home Depot's chief financial officer, Carol Tome, said in a conference call with investors last week. "Atlanta was frozen, for example. It was tough here." Even with the economic concerns, investors were able to set aside the volatility of January for three reasons, market watchers said. First, corporate earnings for the fourth quarter overall turned out to be pretty good. Earnings at companies in the S&P 500 index grew 8.5% over the same period last year, according to FactSet. Revenue growth also picked up, albeit slightly. The Fed, once again, came to the market's side. Janet Yellen, who in February took over as Fed chair, reaffirmed that the central bank plans to keep its market-friendly, low-interest-rate policies in place for the foreseeable future. Lastly, weather, by its very nature, is temporary. Spring will come, at some point, and the winter storms that have kept businesses closed and consumers away from stores will fade, investors say. All that pent-up demand will help the economy recover some of the ground lost in January and February. "I think 70%, 80% of the weakness we saw in January and February was weather related and we will pick up strength in the spring thaw," said Bob Doll, chief equity strategist at Nuveen Asset Management. Investors will have less information to work with in March than they did in February. Earnings season is basically over, so investors won't have any corporate earnings news to respond to. In the absence of company news, investors would typically look to the steady stream of economic data to find direction. However, the severe winter weather of the last two months is likely to make the upcoming economic reports even more difficult to interpret. "You're going to be able to put on spin on any report: 'Well, [that's] better than it should have been' or 'Well, it was the weather,' " Clemons said. "We'll get more trustworthy numbers in April." On Friday, the S&P 500 rose 5.16 points, or 0.3%, to 1,859.45. It was the second all-time closing high for the S&P 500 in a row. The S&P 500 is now up 0.6% for the year.
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