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(Bloomberg) — It’s the round-trip ticket that no one on Wall Street wanted.
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On Monday, the S&P 500 briefly fell below its closing level on November 5, just before Donald Trump’s election, and closed barely above that level on Monday. Investors are dumping stocks and interest rates are rising as fears grow that inflation remains stubborn and the Federal Reserve will have to scale back plans to cut rates this year to combat it. Surprisingly strong jobs data released Friday only intensified those concerns.
The equity benchmark fell to a low of 5,773.31 earlier in the session, but erased losses to end the day marginally higher at 5,836.22. Before votes were counted on Election Day, the S&P 500 closed at 5,782.76. It then jumped 2.5% on November 6 after Trump was declared the winner, posting its best post-election session ever. And it continued to climb the following month, ultimately increasing by 5.3% between November 5 and its peak on December 6. It is down more than 4% from this historic high.
Several reasons explain this decline: the economic outlook is deteriorating; investors are increasingly concerned about high stock valuations; and growing concern about the Fed’s rate cut trajectory. Traders also weighed the potential implications of Trump’s proposed policies, which include drastic tariffs on imported goods and mass expulsions of low-wage undocumented workers.
Fear is already showing in the bond market, where the 20-year Treasury yield is above 5% and the 30-year yield topped the mark on Friday before slipping just below. Today, the policy-sensitive 10-year yield is heading in that direction, reaching its highest level since late 2023.
Stock market volatility is also increasing with the Cboe Volatility Index, or VIX, hovering around 20, a level that typically indicates trader angst.
“This is a case of high expectations turning into reality,” said Michael O’Rourke, chief market strategist at JonesTrading, noting that turning campaign promises into policy is an arduous process.
There is also growing recognition that tariffs will be a cornerstone of the new government’s policy, something investors generally dislike, given that tariffs tend to weigh on growth. “The honeymoon may be over,” O’Rourke added.
Different market
One thing is clear: Trump enters the White House with a very different stock market than 2017. To begin with, valuations were hardly stretched then, but they are now at precarious levels. The S&P 500 is up more than 50% since the end of 2022 after posting gains of more than 20% for two straight years. In 2024 alone, he has broken more than 50 records. Compare that to Trump’s first term, when the S&P 500 posted a 9.5% gain in 2016 and rose just 8.5% over the previous two years.
Interest rates were also significantly lower at the time than they are today, making generating stock market returns even more difficult. The yield on the 10-year Treasury was 2.47% at Trump’s inauguration on January 20, 2017, and the highest it reached during his term was 3.24%. Today it is close to 4.8%. And the Fed appears reluctant to aggressively cut rates in the near future.
The initial exuberance around Trump’s agenda has subsided somewhat in recent weeks, particularly after recent unrest over a possible government shutdown and signs of disagreement within the Republican Party on other issues, such as the H1B visa.
“They serve as an almost constant reminder of the drama Trump can create (directly or indirectly) over seemingly mundane functions of government,” Tom Essaye, founder and president of Sevens Report Research, wrote in a Dec. 31 note to clients. .
“This is important because Republicans have a tiny majority in the House and a slim majority in the Senate and this drama increases fears that pro-growth initiatives will be derailed by this infighting and that more of this type of episodes continue, the more markets risk derailing. We are beginning to doubt whether hopes for growth will come to fruition,” he added.
Higher for longer
Additionally, while investors like Trump’s deregulation and tax-cut plans, economists and strategists view his tariff and immigration proposals as potentially inflationary, which could keep US rates low. interest higher than Wall Street had expected.
Fed Chairman Jerome Powell said on November 14 that policymakers were not seeing signals to “rush to lower rates.” And at a news conference last month, Powell said some policymakers had begun to factor the potential impact of higher tariffs into their assumptions, but noted it was premature to draw conclusions .
“Monetary policy uncertainty is higher today, and this will likely remain true for at least several months as the new administration implements tax and tariff policies,” wrote Dennis DeBusschere of 22V Research in a note to clients last month.
On the other hand, Wall Street also has reason to be optimistic about a second Trump term — especially because he tends to view the stock market as his report card. For traders, the hope is that he won’t do anything that could harm the market’s recovery.
“Specifically regarding tariffs, markets are betting that they will be used as a negotiating tactic and not as a blunt instrument,” David Bahnsen, chief investment officer of Bahnsen Group, said in a telephone interview last month. The idea is: “If there is a negative market reaction, then President-elect Trump’s attachment to the market as a review of his presidency will cause him to reverse course.” »
(Updated index movements in second and third paragraphs. Table updates.)
