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February 3, 2025
Institutional BlogNews
Here are the recent returns from various market indices:
The above numbers show a consistently positive environment for domestic stocks, especially the large cap tech stocks, which are a significant percentage (30%) of the S&P 500 index. While remaining in negative territory over the trailing three months, international stocks have come back a bit in January. The trailing twelve months numbers, led again by the S&P 500, are strong across the board.
No doubt expectations for a positive investment landscape from the incoming Administration as well as prospects for AI explain much of these recent results. Yet, it seems clear that we are in for political disruption and uncertainty resulting in continued volatility.
The S&P 500 numbers include the impact of the recent sell-off in some domestic tech companies, primarily Nvidia, due to the introduction of competition from the Chinese Company DeepSeek. While the falloff in Navida reflects the threat to its dominance, the impact was not negative across the board – Amazon, Google, and Meta were up in January. The positive impact on the stocks of these companies is consistent with lower costs from increased competition leading to more applications for AI going forward.
The outlook for interest rates continues to play an important role in capital markets. The accompanying Yield Curves show that over the past twelve months yields for short-term bonds have dropped but increased at the longer end. The 4.68% yield on the bellwether 10-yr Treasury is up nearly 1.0% over the past year. These changes have brought today’s pattern of yields to its more typical upward sloping shape.
While in check for now, the Administration’s policies on immigration, tariffs, and taxes raise concerns for renewed inflation. Yet the difference between nominal and inflation adjusted yields, a signal of market expectations for inflation, has remained relatively constant at 2.3%. We’ll see.
Yield is what’s earned by holding an individual bond to maturity – return is the difference in the bond’s price plus any interest received over a specific period – two different measures. If an individual bond is held to maturity, then return equals yield. But yields and prices change over time in response to market conditions. Therefore, a bond’s return is volatile on its journey to maturity.
If maintaining a commitment to a bond portfolio is part of a long-term investment strategy, then individual bond proceeds are reinvested in a new bond. Consequently, bond portfolios don’t mature. The weighted maturity of the bonds in a portfolio, termed duration, is an important characteristic. It measures the portfolio’s response to changing yields (risk). Bond portfolios are generally managed to maintain an established duration.
Note from the above recent data that bond returns have been close to zero recently. However, because bond prices are not only less volatile but also behave independently from stocks, they are an important risk management tool. Market history tells us that there will be future periods when bonds will do better than stocks.
If you’re ready to start planning for a brighter financial future, Rockbridge is ready with the advice you need to achieve your goals.