October 25, 2025

My Thoughts on
the Market

Weekly Edition

How did the markets do?

• Stocks had a solid week, with all major indices up around 1.5-2%.
• Bonds stayed relatively flat as investors are waiting for announcements from next week’s Fed meeting.

What headlines moved the markets?

• We are in the midst of earnings season, when public companies report their earnings for the last quarter.
  • Most companies reported better-than-expected results for the third quarter.
  • This is why investors should focus on fundamentals rather than headlines.
• The Fed is expected to cut rates next week even with limited economic data due to the continuing government shut down.
  • Inflation for September came in at 3%, which was slightly higher than August, but still inline with expectations.
  • The Fed is prioritizing the softening labor market over inflation concerns.
• Gold prices dropped sharply by as much as 8% after hitting record highs.
  • This sort of volatility is normal for gold, if stocks fell by that much in such a short period it would be major headline news.
  • Gold is good for jewelry, but not for investing.

Personal Finance: how are bonds valued?

• Bonds are very different from stocks - they are basically an IOU (I owe you) from a company, municipality, or the government.
  • You invest X amount to purchase the bond, and in return you get paid Y amount in interest for a determined period of time, after which the bond matures and you get your money back.
• Investors own bonds both for the income generated by the interest payments and the stability of the principal, which is why they are often referred to as fixed income investments.
  • Bonds are similar to CDs (certificates of deposit).
    • The difference is that you can sell your bonds for cash, sometimes at a profit, whereas you typically pay a penalty to get out a CD.
• Bonds usually pay a higher interest rate than savings accounts, so investors often use bonds as a safe haven asset in lieu of cash.
  • Bond prices are much less volatile than stock prices.
  • Owning bonds both reduces the overall risk of your portfolio and provides dry powder that can be reinvested into stocks during periods of volatility.
    • Hence the “standard 60/40 portfolio” (60% stocks/40% bonds).
• Bond prices move inversely to interest rates - as the Fed cuts rates, the prices of bonds issued prior to the rate cut appreciate.
  • For example: you purchase a 10 year treasury bond for $1000 that pays 5% interest. You will receive $50 per year for ten years and then get your $1000 back.
    • Assume that the next day the Fed cuts interest rates to 4%. Newly issued 10 year treasury bonds going for $1000 now only offer 4% interest.
    • If you were to sell your 5% bond you would get more than $1000 because that higher interest rate is no longer available and investors are willing to pay a premium to get it.
• When you look at the performance of bonds in your portfolio, it’s important to remember that the interest payments are based off of par value (the $1000 initially paid when the bond was issued) and don’t fluctuate with the current bond price (in most cases).
  • You only lose money on a bond if you sell it at a loss before it matures (before it gives you your $1000 back) or if the issuer defaults (goes bankrupt).
    • Inflation is another way that investors can lose money on bonds, but that’s a loss in purchasing power, not nominal dollar value.
  • When evaluating the performance of your portfolio, it’s critical to factor in the income that you will receive from your bonds, not just the price movements.
    • Retail brokerages like Fidelity and Schwab don’t do a very good job of illustrating or explaining this.
• For more info on bonds, check out this article written by my friend and colleague, David Darby: When and Why to Invest in Bond Funds or Individual Bonds

Quote of the week
"You can't have negative job growth AND 4% GDP growth. Either the labor market rebounds to match the GDP growth, or GDP growth is going to slow." – Fed Chair Jerome Powell

• The Fed meets next Tuesday and Wednesday, 10/28-29 to decide on interest rates.
  • It is widely expected that they will cut rates by at least 0.25%.
  • Lowering rates provides cheaper access to loans and stimulates economic growth.
    • Think of lending as grease in the engine of the economy.
  • The drawback is that more borrowing equals more money in the system, i.e. more inflation.
    • Think of spikes in inflation as the result of the engine overheating.

Conclusion

• Company earnings in the third quarter of this year were decent, despite trade/tariff/geopolitical uncertainty.
• Bonds tend to do well during periods of declining interest rates.
• Inflation is tepid and the job market is softening, which can be the early warning signs of a slowing economy. Investors are expecting the Fed to lower rates to keep things humming along.

Have a nice weekend!

Kevin