January 25, 2025 Market Update

All major U.S. equity indexes posted gains this past week.  The S&P 500 Index recorded a new all-time high before retreating slightly on Friday.   The S&P 500 Index advanced 1.74%, whereas the Dow and Nasdaq posted weekly gains of 2.15% and 1.65%, respectively.  The Russell 2000 Index, a proxy for small-cap stocks, was up 1.40%.

Ahead of next week's Fed meeting, the bond market remained relatively calm, with 10-year Treasury yields largely unchanged from the previous week.  The broader U.S. bond market, as tracked by the Vanguard Total Bond Market ETF, posted a modest gain of 0.13%.

The International Monetary Fund (IMF) recently warned that President Donald Trump's proposed policies, including higher tariffs, could revive inflation and limit the Federal Reserve’s ability to cut interest rates.  The IMF's chief economist noted that these policies could lead to increased price pressures in the economy.

In contrast, President Trump has throttled back his tariff rhetoric since taking office and has introduced policies aimed at boosting domestic manufacturing and strengthening supply chains, with the goal of alleviating supply-side constraints and thereby reducing long-term inflation risk.  Additionally, even if tariffs raise import costs, increased competition from global markets and advancements in technology could help keep price increases in check.

Uncertainty surrounding the impact of President Trump’s policies, as well as the Federal Reserve’s future actions, has triggered renewed interest in Treasury Inflation-Protected Securities (TIPS) as a reliable tool for preserving purchasing power, particularly for conservative investors.

That’s because the principal received when a TIPS bond matures is adjusted to reflect changes in the Consumer Price Index (CPI) during the bond’s term.  As a result, TIPS ensure that their value keeps pace with inflation.

Currently, TIPS offer a guaranteed return of over 2% above the inflation rate for all bonds with maturities exceeding 7 years — levels not seen in over a decade.  This means that purchasing TIPS today ensures the proceeds at maturity will maintain 2% or so more purchasing power than the amount invested, regardless of inflation fluctuations in the interim.

Please let us know if you would like to explore how TIPS might fit into your portfolio.

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