February 3, 2025

“Rule #1: don’t lose money. Rule #2: Don’t forget Rule #1.”

Warren Buffett.

Happy Groundhog Day! He saw his shadow, so 6 more weeks of cold!

After a very tragic week with two airline crashes taking 74 souls, nothing can be said to alay the horror to their families. That and the continued partisan games in Washington made for an unhappy week. However, the markets, despite the news, did manage to get a footing. Here are the numbers, the S&P 500 gained 1.2%, the Dow Jones Industrial Average added .90%, the Nasdaq led up 2.05%. Internationally the FTAE 100 had a good week up 2.02% and to MSCI-EAFE added .7% The 2-year treasury paid 4.20% and the 10-year yield was 4.543%.

It was a rollercoaster January, characterized by another all-time closing high for the S&P 500®, followed by a sharp selloff after a new AI model from China sent shockwaves through the world. Nevertheless, thanks to relatively strong earnings results and robust consumer spending, the S&P 500 remained resilient, concluding the month with a 3% gain. Mid and small caps outperformed their large-cap peers, with the S&P MidCap 400® and S&P SmallCap 600® up 4% and 3% respectively. Concerns surrounding Fed rate cut uncertainty and inflation continued to weigh on investors. Most sectors posted gains in January, led by Communication Services, Health Care and Financials. Information Technology was the only laggard, down 3% upon AI related headwinds.

Last week’s Federal Reserve meeting resulted in the Federal Reserve leaving its policy rate unchanged for the first time since delivering its initial rate cut in September. The Fed funds rate stands in the range of 4.25% to 4.5%. After delivering a cumulative percentage point of interest-rate cuts over their last three meetings of 2024, Fed officials last Wednesday unanimously voted to pause, take a breath, and hold for more data to reassess the path of inflation over the coming months. Fed chair Jerome Powell said there was “no hurry” for the Fed to move, but that signs of a weaker job market or good inflation news might get the central bank off the fence sooner.  But some economists were saying last Wednesday that the cutting cycle is over, while others think Chair Jerome Powell’s Federal Reserve won’t ease again until 2026. President Trump was quick to respond, posting on Truth Social later last Wednesday afternoon that he’ll take matters into his own hands while the Fed sits on its hands: “Because Jay Powell and the Fed failed to stop the problem they created with Inflation, I will do it by unleashing American energy production, slashing regulation, rebalancing international trade, and reigniting American manufacturing,” the president wrote. Market pricing currently implies the greatest odds of two quarter-point rate cuts by year end, in line with FOMC members’ median forecast offered in December. A lot can and will change between now and the end of 2025, including the Fed outlook.

And Inflation? The PCE index rose 0.3% last month, the government said last Friday, to mark the biggest increase since last April. The increase in inflation in the past year was at a seven-month high of 2.6%, up from 2.4% in the prior month. As recently as September, the rate of PCE inflation had slowed to a 3½-year low of 2.1%. With inflation heading in the wrong direction, this was a big factor for leaving its benchmark short-term interest rate unchanged. The so-called fed-funds rate influences other interest rates in the economy that affect households and businesses.

This week, Investors are bracing for global market volatility after the U.S. triggered a trade war between its closest neighbors and largest trading partners over the weekend.

President Donald Trump on Saturday imposed 25% tariffs on Canada and Mexico and 10% on China. Canadian energy products will be tariffed at 10%. The leaders of Canada and Mexico quickly announced their own retaliation plans. While Canada and Mexico depend more on U.S. exports than the U.S. does on them, the moves could hit certain U.S. sectors and pocketbooks hard. U.S. markets closed down the final trading day of the month after news of impending tariffs sparked renewed market jitters.

Internationally, Major European stock indexes finished at record closing highs on Friday and outperformed their U.S. counterparts for the month. For January, the STOXX Europe 600 Index closed up by 31.91 points, or 6.3%, at 539.53. The U.K.’s FTSE 100 Index finished the month up by 500.94 points, or 6.1%, at 8,673.96. And the German DAX rose 1,822.91 points, or almost 9.2%, this month to 21,732.05. but we believe going forward the US is the place to be.

Vanguard’s fixed income analysts reported, that the overall outlook for bonds in 2025 is notably positive. Vanguard anticipates an era where interest rates remain above inflation, helping investors achieve success in fixed income. Yields are attractive compared with those observed since the 2008 global financial crisis. Still, uncertainties underlie the outlook, given potential changes to U.S. immigration and trade policy. Monetary easing is expected to continue in 2025, albeit at a notably slower pace this year in the U.S. Bonds is positioned to perform well across a range of scenarios, which strengthens the case for their role in a portfolio, especially for those investors who hold excess cash. Most bond yields are comparable to or notably higher than prevailing money market rates, and bonds offer better diversification properties.

One final thought on the Real Estate market, U.S. commercial-property pricing slipped in 2024, with a mixed showing across property types. The RCA CPPI National All-Property Index fell 0.7% in December versus a year earlier, as the price indexes for retail and industrial rose, while pricing for apartment and office properties continued to decline. No surprise as low inventory and still high mortgage rates still dominate the sales environment.

Mike