February 2010 Recap

After enduring an 8.03% drop from Jan. 19 to Feb. 8, the S&P 500 posted a solid monthly gain despite concerns about sovereign debt and lackluster economic data.

January retail sales data showed that U.S. consumers are starting to pull more of their weight, but a surprising increase in initial jobless claims and disappointing durable goods report near the end of the month kept investors expectations for the economy tempered. Housing data didn’t help either, with sales of previously owned U.S. homes falling 7.2% in January to a seven month low.

More important to the markets was the Federal Reserve raising the interest rate it charges banks for emergency loans and reaffirming that broad tightening of credit was not imminent. In addition, core consumer prices fell for the first time since 1982, leaving room for the Fed to keep rates relatively low if necessary.

The MSCI EAFE index posted a small loss of 0.65% on weaker-than-expected European Union GDP data and concerns surrounding Greece’s debt problem. The MSCI Emerging Markets Index squeaked out a 0.34% gain in the face of China removing economic stimulus. The bright spot among international areas was the MSCI Pacific Ex-Japan Index, which posted a 3.12% gain on strength in Australia.

Domestic REITs outperformed all other asset classes amid merger and acquisition activity. Multiple bids were made public for General Growth Properties, which filed for the biggest real-estate bankruptcy in U.S. history after amassing $27 billion in debt during an acquisition spree. Simon Property Group offered $10 billion and Brookfield Asset Management, which owns roughly $1 billion in General Growth debt, offered $2.63 billion for a 30% stake. General Growth is holding out for a higher bid, which led REITs to advance further.

Rates were barely lower for the month, falling just a few basis points across the curve, while news in bond land was dominated by sovereign credit issues overseas. Corporate spreads domestically were tighter by a few beeps compared to the end of January, despite widening out mid-month to levels not seen since November.