(Bloomberg) — It’s the round-trip ticket that no one on Wall Street wanted.
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On Monday, the S&P 500 index briefly fell below where it ended on Nov. 5, just before Donald Trump was elected president, and closed only slightly above that level on Monday. Investors are dumping stocks and interest rates are rising as fears grow that inflation remains persistent and the Federal Reserve will have to scale back its rate cut plans this year to combat it. Friday’s surprisingly strong jobs data only intensified those concerns.
The stock benchmark fell to a low of 5,773.31 early in the session, but erased losses to end the day modestly higher at 5,836.22. Before the vote count on Election Day, the S&P 500 closed at 5,782.76. It then jumped 2.5% on Nov. 6 after Trump was declared the winner, recording its best post-Election Day session. And it continued to rise over the next month, eventually rising 5.3% from November 5th to its peak on December 6th. It is down more than 4% from that all-time high.
There are several reasons for the decline: the economic outlook is deteriorating; Investors are increasingly concerned about high stock valuations; and growing anxiety over the Federal Reserve’s rate cut path. Traders have also been assessing the possible implications of Trump’s proposed policies, which include sweeping tariffs on imported goods and mass deportations of low-wage undocumented workers.
Fear is already playing out in the bond market, where the 20-year Treasury yield is above 5% and the 30-year yield surpassed the milestone on Friday before falling just below. Now the policy-sensitive 10-year bond yield is heading in that direction, reaching the highest level since late 2023.
Stock market volatility is also rising: The Cboe Volatility Index, or VIX, hovers around 20, a level that typically indicates distress among traders.
“This is a case of high expectations crashing into reality,” said Michael O’Rourke, chief market strategist at JonesTrading, noting that turning campaign promises into policies is an arduous process.
There is also a growing realization that tariffs will be a key policy of the new government, something that investors typically dislike, given that tariffs tend to weigh on growth. “The honeymoon may be over,” O’Rourke added.
Different market
One thing that is clear is that Trump enters the White House with a very different stock market than in 2017. Valuations barely stretched then to begin with, but 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 consecutive years. In 2024 alone, it has achieved more than 50 records. Compare that to Trump’s first term, when the S&P 500 was coming off a 9.5% gain in 2016 and was up just 8.5% in the previous two years.
Interest rates were also significantly lower then than now, making generating returns in the stock market much more difficult. The 10-year Treasury yield was 2.47% when Trump took office on January 20, 2017, and the high it reached during his term was 3.24%. Today, it is close to 4.8%. And the Federal Reserve appears reluctant to aggressively lower rates any time soon.
The initial exuberance around Trump’s agenda has subsided somewhat in recent weeks, especially after recent turmoil around a possible government shutdown and signs of disagreements within the Republican Party over other issues, such as the H1B visa.
“They are a near-constant reminder of the drama Trump can create (whether directly or indirectly) in seemingly mundane functions of government,” Tom Essaye, founder and president of Sevens Report Research, wrote in a note to clients on Dec. 31. .
“This is important because Republicans have a tiny majority in the House and a slim majority in the Senate and this drama is raising concerns that pro-growth initiatives will be derailed by this infighting and the longer this kind of thing goes on. of episodes, more markets will be affected. “We began to doubt the realization of growth hopes,” he added.
Higher for longer
Additionally, while investors like Trump’s plans for deregulation and tax cuts, economists and strategists view his tariff and immigration proposals as potentially inflationary, which could keep interest rates higher for longer than expected. that Wall Street had anticipated.
Federal Reserve Chair Jerome Powell said on Nov. 14 that policymakers were not seeing signs that made them want to “rush to lower rates.” And at a news conference last month, Powell said some policymakers had begun to factor in the potential impact of higher tariffs into their assumptions, but he noted it was premature to draw conclusions.
“Uncertainty over monetary policy is heightened today, and is likely to remain that way for at least several months as the incoming administration implements fiscal and tariff policies,” 22V Research’s Dennis DeBusschere wrote in a note to clients last month. past.
On the other hand, Wall Street also has reason to be optimistic about a second Trump term, specifically because it tends to view the stock market as its report card. For traders, the hope is that it doesn’t do anything to hurt the market’s rally.
“Specifically on tariffs, markets are betting that they will be used as a negotiating tactic and not as a blunt instrument,” David Bahnsen, chief investment officer at Bahnsen Group, said in a phone interview last month. The idea is that “if there is an adverse market reaction, then President-elect Trump’s penchant for the market as a report card for his presidency will cause him to change course.”
(Updates the index movements in the second and third paragraphs. Updates the chart.)
