See our recap of February's key statistics and market commentary to help guide your investment decisions. 

Noteworthy Numbers

The NASDAQ Composite Total Return is positive by 8.43 percent year-to-date. The NASDAQ Index was a leading US index, outperforming the S&P 500 (5.94) and the Russell 2000 (2.33).

The U.S. Consumer Price Index (CPI) rose 2.5 percent in the 12 months through January representing its biggest year-on-year increase since March 2012. The index for all items excluding food and energy rose by 2.3 percent over the last 12 months. Inflation is a key data point for future Fed interest rate decisions.

Household debt in the U.S. was reported at $12.58 trillion, a level not seen since 2008. The rising debt is being attributed to rising home and auto loans, although credit card and student loan debts have also increased. Rising debts are another sign of consumer confidence, when people feel their jobs are secure or expect future wage increase they have the confidence to take on more debt. 

Our Take

The month of February saw an impressive rally in the stock market, with the Dow Jones Industrial Average hitting all-time highs during a stretch when the index went on a 12-day streak of positive finishes before falling slightly on the last day of the month. Incredibly, the index finished positive on 15 out of 19 trading days during the month. For some perspective, 13 consecutive positive days would have tied the Dow’s previous winning streak that occurred in January of 1987. Investors could almost be forgiven for thinking that their holdings won’t ever lose value again. Of course, this isn’t the case. Stocks can and will (at some point) decline. Though a strong corporate earnings season and number of recent economic releases provide cause for optimism, now is a good time for investors to temper their expectations and resist the urge to get more aggressive in their portfolios.

First, consider corporate earnings. U.S. companies have been releasing a string of positive results from the fourth quarter of last year. According to FactSet, as of February 20th, 90 percent of companies in the S&P 500 have reported earnings and over two-thirds have beaten the consensus analyst estimates. The blended earnings growth rate for the index stands at 4.9 percent; the fourth quarter will represent the first time the index has seen year-on-year growth in earnings for two consecutive quarters since the end of 2014.

Markets have received good news beyond the corporate realm as well. A number of economic indicators point to more production, more jobs and improving business and consumer sentiment. Early in the month, the country’s employment situation was shown to improve with the economy adding 227,000 nonfarm payroll jobs. The unemployment rate ticked up from 4.7 percent to 4.8 percent, but this is largely due to the labor force participation rate increasing—more people entering the labor force to search for jobs. Inflation is beginning to consistently hit above the Fed’s two percent target; the Consumer Price Index numbers in February show a 2.5 percent increase year-on-year. The Consumer Confidence Index came in at a very strong 114.8 in February, its highest level since July 2011, while the Philadelphia Fed Business Outlook Survey stunned observers with the strongest output since January of 1984.

Minutes from the Fed’s most recent meeting reflected this confidence in the economy by signaling what most observers are already expecting: two to three additional interest rate hikes in 2017. Interestingly, whereas in recent years the market has hung on every word coming out of the Fed, investors almost seem to view Fed actions this year as background noise. This is likely because there’s much less concern about whether the economy is strong enough for a rate hike, and also because investors are much more focused on potential fiscal stimulus coming out of the Trump administration.

Much of the stock market rally can be attributed to expectations surrounding Trump’s administration. Less regulation, lower taxes and a big infrastructure package all have the potential to provide strong tailwinds for U.S. stocks. What gives us pause is that expectations rarely reflect reality, especially when it comes to public policy. Deregulation, tax reform and infrastructure are likely to occur under Trump, but only after drawn-out negotiations and implementation. Even the Trump administration has signaled that the infrastructure package won’t be a top agenda item until 2018. This time last year, markets had been routed because investors saw huge risks in a slowing China, fractures in the E.U. and concerns about Fed interest rate hikes. Markets were calculating that each headline risk on the horizon would go wrong. This year, the inverse is true. Markets appear to reflect all of these bullish factors occurring as Trump has promised and in the very near term.

This isn’t to say the market rally is completely unwarranted. Economic conditions are in a good place, the Fed is being characteristically cautious with its interest rate decisions and the U.S. has a president who is first and foremost interested in creating jobs. Still, new risks will inevitably crop up and political realities will sink in. When that happens, be prepared for market volatility to increase.