FEBRUARY 2025 — RISK-OFF

February saw a clear rotation towards risk-off. As shown in the cycle dashboard, all but one “early cycle” sectors underperformed last month, while all “recession” sectors outperformed. Notably, Consumer Discretionary (-9.5%) and Communication Services (-6.5%) posted the steepest declines, whereas Consumer Staples (+5.5%) and Real Estate (+4.5%) delivered the strongest gains.

Among factors, Low Volatility (+4.5%) significantly outperformed High Beta (-5%). Small Caps and Innovation stocks fell out of favor. Investors sought refuge in defensive exposures, with Telecommunication Services surging 13.5%, its best monthly performance since 2002! Food, Beverage & Tobacco also served as a safe haven.

The Hang Seng (Hong Kong) posted a robust 13.5% rebound, while Europe delivered a respectable +3.5%. Both the VIX and the Put-to-Call ratio spiked, though their levels remained relatively contained. Meanwhile, the AAII retail investor survey swiftly slipped into extreme bearish territory.

Oil’s rebound to $80 continued to unwind, slipping back below $70. NatGas surged to retest recent highs at $4.30 (its highest since 2022) before settling at $3.85. Copper (+5.5%) led Metals, while Lumber (+7.5%) extended its YTD gain to 15%. Orange Juice erased a year of steady gains in a single month (-37%), with Cocoa (-18%) and Grains also declining, led by Corn (-6%).

The JPY and SEK, two currencies from global industrial powerhouses, outperformed, each gaining ~3% vs. the USD. Cryptos tumbled, with Ethereum plunging 35%, back to Fall 2024 levels.

Interest rates fell globally, more sharply in the U.S.—the 2Y UST dropped 20 bps to 4% (lowest since Oct ’24), while the 10Y fell 35 bps to 4.2%. Duration rewarded investors. Credit spreads widened, with High Yield up 30 bps.

CHART OF THE MONTH

Tariffs: Markets Work in Mysterious Ways

Over the past few weeks, stock markets in countries targeted by Trump’s tariffs have outperformed. Notably, since the start of the year, Hong Kong’s Hang Seng Index and the Euro STOXX 50 Index have gained double digits. Meanwhile, the UBS Trump Tariff Losers basket, which tracks U.S. stocks negatively impacted by import tariffs, has declined 14% since late January.

RISK-OFF

February was unmistakably risk-off. Geopolitical tensions rose, economic forecasts were cut, and inflation remained stubborn.

Defensive positioning dominated: Low-volatility stocks led factor performance, with the bottom quintile outperforming the top one by nearly 1,300 bps, while Momentum’s two-year run abruptly ended. Sector moves reinforced the message—recessionary plays like Consumer Staples and Real Estate outperformed, while early-cycle sectors lagged. Notably, the Telecommunication industry surged 13.5%, marking its best month since 2002.

Risk appetite faded. Small Caps underperformed, innovative themes lost traction, cryptocurrencies plunged, and newly IPO’d stocks retreated.

Market stress indicators spiked. The VIX, Put-to-Call ratios, and oversold breadth all signaled heightened risk aversion. The AAII survey hit extreme capitulation, with Bulls and Bears hitting opposite extremes in tandem.

The 10Y US Treasury yield fell 35 bps. Long-duration bonds returned +5.5%.

Gold extended its rally, reaching a new all-time high just below $3K during the month.

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