End of February Market Update
This may be the biggest AI month in terms of impact that we’ve had so far. Markets had priced in winners before, but in February 2026 they finally got around to thinking about who would be the losers. And they decided that the companies that provide software as a service, the financial companies that lent money to those SaaS firms, and the employees who work at those firms would be the losers. Once you start thinking about losers, it’s a short jump to thinking about the potential contractionary effects of AI, and you start to warm up to the idea that interest rates might fall. Ten-year bond yields plunged to a four-month low of 3.96% while mortgage rates finally went under 6%. All that on a day where producer price inflation spiked upward. Economic fear is starting to trump inflation concern. That means stocks and bonds will move in the opposite direction.
Investors should also be aware that quality is winning in the bond market right now. Yield spreads are modestly widening as investors get nervous about the lowest quality credits. Private credit, which is basically low quality (BB-CC) credit, has had a couple of nasty days this week in the wake of the default of a British mortgage originator and the run on Blue Owl assets. Financial company stocks got pummeled this week. We are all in the position now of hoping that the current difficulties are isolated and not symptomatic of a much larger credit problem (a la 2008).
We now have to look at the stock market with more nuance. The trade from November through January was to sell technology/large cap growth and buy value/small cap/international. As we discovered this past week, however – financials (banks, insurance companies, global asset managers) are generally found in value funds, and they were easily the worst performers. As for small caps, they had a nice rally early in the year as money came out of the Mag 7 and tax loss selling dried up, but they peaked on January 22. They are now down more than 3% from those highs. Only international stocks are continuing to reward the money that has come out of large U.S. tech stocks.
Beyond that, the precious metals trade continues to work. Unless you bought gold at the top of the spike (January 28th and 29th) you have a profit. Mining stocks have actually surpassed their end-of-January highs because profits margins are so high with gold near $5200/oz. Silver had a much bigger spike and a much more severe fall, so while it was up in February it is well below its January high. Copper and oil continue their sharp 2026 ascent as each are important components to the AI build out.
So the bottom line is be careful. The bond market thinks that the average consumer is weak, aggregate metrics notwithstanding, and that interest rates are going to surprise to the downside. The stock market thinks that interest rates are going lower even though inflation is still in the 3% range because of weakening labor, and it is expressing its fear of “debasement” in terms of buying gold and silver. Other industrial metals are gaining on the “we need more power” trade.
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