March is most often a positive month for the stock market, but this year it may bring more of the same turbulence that rattled investors in February. Stocks are set to exit February with steep losses, with the S & P 500 down 2.3% for the month through Monday. The index is still up 3.7% for the year so far. “February is the second worst month of the year, posting an average decline of 0.21%, which is the second worst after September,” said Sam Stovall, chief investment strategist at CFRA. “However, March on average posts a gain of 1.1%, rising 64% of the time.” March is the fifth-best month for the S & P 500, according to CFRA data going back to 1945. In a month punctuated by the Federal Reserve’s interest rate decision looming on March 22, stocks are bound to be choppy, particularly if Treasury yields continue to rise. A sharp rebound in yields in late February helped send stocks lower, particularly last week, when the S & P 500 was down 2.7% — its worst weekly performance of 2023. .SPX 1Y line stocks The 10-year Treasury yield edged back up towards 4% last week, after falling as low as 3.3% in early February. Yields move in the opposite direction to price. “I think absolutely the Fed is driving the market, and I think the March FOMC meeting will be very important because with every economic data point that comes out, it seems to increase the likelihood of a 50-basis point hike,” said Stovall. Fifty basis points equals a half percentage point. Investors have been expecting only a quarter point hike, but hotter-than-expected inflation data and strong jobs and retail sales reports have increased the odds for a bigger increase in the benchmark fed funds rate. CPI rose 0.5% in January, after climbing just 0.1% in December. “March is a pivotal month for the Fed. The Fed is definitely driving the bus,” said Stovall. Economic data could set the tone in March, as investors weigh whether the Fed is succeeding in slowing down the economy and inflation. ‘Rockier’ than thought “I think it’s going to be rockier than people think,” said Richard Bernstein, CEO of Richard Bernstein Advisors. Bernstein, too, said the Fed policy meeting and the series of data releases ahead of that meeting could be the biggest catalyst for stocks in March. “It’s the modern day fighting the Fed,” he said. “It used to be ‘don’t fight the Fed’ meant you were too bearish as the Fed tried to juice up the economy. Now everybody is too bullish, and the Fed’s trying to calm things down.” US10Y 1Y line ten year Bernstein said the March 10 release of the February employment report and the consumer price index, expected March 14, will be especially important, as investors assess how much the Fed could raise interest rates. If the consumer price index comes in either lighter or hotter than expected, the market should react. “Tech is going to outperform like a madman,” with a cooler number, Bernstein said. “If it comes in [higher], it’s going to underperform like a madman.” Bernstein said investors have yet to adjust to the idea that the Fed may raise rates more than they expect and hold them higher for a longer period of time. “From our perspective, I think investors should be positioned that inflation is going to be tougher for the Fed to fight than people think,” he said. Tech and growth stocks are the most affected by higher interest rates. They are typically priced at higher valuation multiples on expectations of future earnings, and those earnings are less valuable as rates rise. More risk “If you’re really in a kind of speculative mood right now, and you are in a high p/e growth oriented portfolio, I think you’re taking on a lot more risk than you think you are in that position,” Bernstein said. Stovall said the sectors that do better in March have historically been real estate investment trusts, consumer discretionary, utilities and materials. The laggards have been health care, information technology and consumer staples, Energy, real estate, and communications services were among the worst performers in February, while tech, industrials and consumer staples did best. Many strategists expect the market to be weaker in the first half of the year, but recover in the second half. But, conversely, Bernstein warns that some of the negative issues for stocks have not yet been priced in. “In the second half of the year, investors are going to come to grips with weakening earnings,” said Bernstein. “People have focused almost primarily on the Fed…and people aren’t thinking about earnings.” Bernstein said a silver lining from weaker earnings could be that companies will become more cost conscious and cut back on hiring. That would reduce some pressure on the job market, which continues to be strong.