February saw investors conjure up a new idea as they continued struggle to come to grips with competing economic scenarios: the “no landing.”

Under a no landing – as opposed to a soft or hard landing – the economy ignores the Federal Reserve and keeps on growing, while inflation eventually moderates (or not).

This is interesting, but it seems unlikely. The Fed has been clear in its determination to do whatever is necessary to get inflation back down to its 2.0% target. One major issue from the central bank’s point of view has been the refusal of the jobs market to cooperate.  This obdurance was on view again early in the month when the Labor Department reported blowout employment numbers for January – 517,000 new jobs and an unemployment rate of 3.4%, a 53-year low. In other signs of persistent economic strength, retail sales rose 3.0% in January (Wall Street Journal, Feb. 15), personal income was up 1.4%, topping estimates of 1.2%, and the personal savings rate came in at 4.7% (CNBC, Feb. 24).

But that robustness was not generally welcomed by the Fed, and it was that view that most impacted markets. On the day the January jobs numbers came out the S&P 500 fell -1.0%, the Dow gave back -0.4%, and the Nasdaq dropped -1.6% (Wall Street Journal, Feb. 3). By mid-month the S&P 500 was posting the worst week of the year and investors were pulling a net $31 billion from US equity mutual funds and ETFs, according to Refinitiv Lipper (Wall Street Journal, Feb. 12).

Higher for longer was clearly not the favored outcome.


Inflation slows

But inflation was in fact continuing to slow, if fitfully. The Consumer Price Index (CPI) rose 6.4% in January, down from 6.5% the month before. This was the seventh straight month of declines (Wall Street Journal, Feb. 14) and left the CPI well below its peak of 9.1% last June, the highest number since 1981 (Wall Street Journal, Feb. 14).

But, as Fed Chair Powell recognized, the decline was unlikely to proceed in a straight line. Speaking to the Economic Club of Washington he acknowledged that while the rate of inflation was indeed falling, “it is likely to take quite a bit of time,” and, “it’s probably going to be bumpy.”

This “bumpiness” was confirmed later in the month by the release of Personal Consumption Expenditures (PCE) data. Excluding food and energy, core PCE came in at 4.7% year over year, against expectations for a 4.4% increase (CNBC, Feb. 24). Markets again reacted negatively. On the day, the S&P 500 fell -1.0%, the Nasdaq was off -1.7%, and the Dow -1.54% (CNBC, Feb 25).

In the end, nothing much worked in February. As a Bloomberg story noted, “the least-bad return among major US assets was a decline of 1.4% through Monday (Feb. 27) from high-yield bonds.” That was followed by Treasuries and the S&P 500, both with declines of -2.5%, a -3.2% fall in investment grade bonds, and a -5% drop in commodities (Bloomberg, Feb. 28).

Bond yields told much of the story. For the period February 2 to March 2, the yield on the 10-year treasury rose from about 3.38% to 4.07% (Yahoo Finance, March 2). The dollar strengthened, with the Wall Street Dollar Index climbing from 101.75 on February 2 to about 104.97 on March 2 (Wall Street Journal, March 2). Emerging markets (EM) were dinged. As of mid-month, EM bonds were off -1.3% and EM stocks had fallen -1.6% (Wall Street Journal, Feb. 15).

One winner for the month was volatility. The Wall Street Journal reported a big increase in the purchase of call options on the VIX, the CBOE Volatility Index (Wall Street Journal, Feb. 26). The VIX itself rose to as high as 22.87 during the month from a low of 17.87 on February 1 (VIX Index). In our view this reflected continued uncertainty over inflation, and the so-called “end point” for the Fed funds rate, which is now above 5.0% and trending higher (Reuters, March 1).

In spite of this, there were reasons to think that the pace of inflation would continue to slow. Apartment rents fell across the country as supply began to catch up with demand (Wall Street Journal, Feb. 27). Supply chain issues saw some improvement (Wall Street Journal, Feb. 21). Finally, there was some evidence that the job market was cooling. Late last year and early this, two major online job recruiters reported a decline in postings bigger than that indicated by Labor Department (Wall Street Journal, March 1).

Milton Friedman famously posited that monetary policy works with “long and variable lags” in relation to its implementation and impact on financial conditions. Perhaps the latest economic releases are signs that the delayed nature of monetary policy is beginning to filter through the economy.

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

The S&P 500® Index is widely regarded as the standard index for measuring large-cap U.S. stock market performance.

The Dow Jones Industrial Average, Dow Jones, or simply the Dow, is a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States.

Nasdaq is used to refer to the Nasdaq Composite, an index of more than 3,000 stocks listed on the Nasdaq exchange The Nasdaq Composite contains all of the companies that trade on the Nasdaq. Most are technology and internet-related, but there are financial, consumer, biotech, and industrial companies as well.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Personal Consumption Expenditures Price Index (PCEP) is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Wall Street Journal Dollar Index is an index of the value of the U.S. dollar relative to 16 foreign currencies

Chicago Board Options Exchange's CBOE Volatility Index, a popular measure of the stock market's expectation of volatility based on S&P 500 index options.

“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.


By subscribing you are consenting to receive personalized online advertisements from New York Life Investments.