February 22, 2025 Market Update

The markets this past week experienced a broad-based decline across major U.S. equity indices, reflecting concerns over inflation, interest rates, and economic growth.  The S&P 500 Index fell 1.66%, while the Dow and Nasdaq each declined 2.51%.  The Russell 2000, which tracks small-cap stocks, posted the most significant drop, falling 3.71%.

Meanwhile, in the bond market, the 10-year Treasury yield declined 1.16%, signaling increased demand for safe-haven assets amid market volatility.  The overall U.S. bond market, as measured by the Vanguard Total Bond Market ETF (BND), rose 0.32%, indicating a modest rally in fixed income.

Notwithstanding the volatility this week, the investor optimism is running hot.  According to Bank of America's latest fund manager survey, investor sentiment is at its highest level since November 2021, with cash allocations falling and risk-taking on the rise.  The survey suggests a growing consensus that the Fed will successfully navigate a soft landing, fueling risk-on positioning in both stocks and credit markets.  But history shows that extreme bullishness can be a double-edged sword—when optimism reaches such highs, markets often become more vulnerable to disappointments.

That vulnerability might help explain the recent surge in gold prices, which have hit record highs.  Goldman Sachs just raised its year-end price target for gold to $3,100 per ounce, citing strong central bank demand, geopolitical risks, and expectations that the Fed will cut rates later this year.  Emerging market central banks, in particular, have been aggressively accumulating gold, as a hedge against currency risks and a shift away from the U.S. dollar.  Trade tensions, rising global uncertainty and surging U.S. deficits have also likely increased gold’s appeal.

Minutes from the Federal Open Market Committee’s January 28-29 meeting showed the Fed remains content to leave rates where they are for the time being.  “Participants indicated that, provided the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments.”

That’s all for now.  Have a great weekend and invest wisely, my friends.