After a volatile month of trading, which witnessed the first 10 percent market correction since February 2016, larger-cap U.S. stocks (Vanguard 500 Index) wrapped up February with a 3.7 percent loss, while small caps fell 3.8 percent (iShares Russell 2000 ETF). Despite a sharp bounce from the early February lows, only the technology sector was able to eke out a positive return, with a 0.1 percent gain at that. Energy was the worst-performing sector, losing more than 10 percent.
Overseas markets also fell in February, largely triggered by the U.S. market turbulence. Developed international stocks dropped 5.1 percent (Vanguard FTSE Developed Markets ETF), European stocks fell 6.1 percent (Vanguard FTSE Europe ETF), and emerging-market stocks lost 5.4 percent (Vanguard FTSE Emerging Markets ETF). Broadly speaking, the U.S. dollar strengthened against most currencies in February, resulting in better returns for dollar-hedged investors.
February’s declines served as a good reminder that markets do not exclusively go up. Until the market’s recent drop, the S&P 500 had rallied for more than 400 days without registering even a 3 percent decline from its high. That was the longest streak in 90 years of market history.
The volatility index (VIX) also moved sharply higher in February: after never closing above 20 in 2017, the VIX jumped to 37 in early February and averaged a closing price above 20 for the month. This sharp spike in volatility resulted in severe losses for a few investment products that were shorting volatility, which has been a popular trade in recent years. The following chart reinforces the fact that double-digit drawdowns in a calendar year are normal and not the exception, which many investors had become conditioned to expect more recently.