(Bloomberg) — It’s the round-trip ticket no one on Wall Street wanted.
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The S&P 500 Index on Monday briefly fell below where it ended on November 5, shortly before Donald Trump was elected president, and closed just slightly 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 rethink its plans for interest rates this year to fight it. Friday’s surprisingly strong jobs data only heightened those concerns.
The stock benchmark fell to a low of 5,773.31 earlier in the session, but pared losses to end the day modestly higher at 5,836.22. Before the votes were counted 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, posting its best post-Election Day session ever. And it continued to climb for the following month, finally rising by 5.3% from November 5 to its peak on December 6.
There are several reasons for the fall: The economic outlook deteriorates; investors are increasingly concerned about high stock valuations; and growing anxiety about the Fed’s rate path. Traders also sized up the potential implications of Trump’s proposed policies, which include huge tariffs on imported goods and mass deportations of low-wage undocumented workers.
The fear has already appeared in the bond market, where the yield on the 20-year Treasuries is above 5% and the 30-year yield rose above the level on Friday before slipping just below. Now the policy-sensitive 10-year yield has soared, reaching the highest level since the end of 2023.
Stock market volatility is also on the rise with the Cboe Volatility Index, or VIX, hovering around 20, a level that typically indicates distress among traders.
“This is a case of high expectations meeting reality,” said Michael O’Rourke, market strategist at JonesTrading, noting that turning campaign promises into policy is an arduous process.
There is also a growing understanding that tariffs will be a key policy of the new government, something that investors typically do not like, given that tariffs tend to weigh on growth. “The honeymoon may be over,” added O’Rourke.
Different market
One thing that is clear is that Trump is entering the White House with a very different stock market than he did in 2017. For starters, ratings were barely flat 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 consecutive years. Only in 2024, he made 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 had only risen 8.5% in the previous two years.
Interest rates were also significantly lower then than they are now, which made generating stock market returns much more challenging. The 10-year Treasury yield was 2.47% when Trump was inaugurated on January 20, 2017, and the highest it reached during his tenure was 3.24%. Today, it is close to 4.8%. And the Fed sounds reluctant to aggressively lower rates anytime soon.
The initial exuberance around Trump’s agenda has waned somewhat in recent weeks, especially after the recent turmoil surrounding a potential government shutdown, and signs of disagreements within the Republican party on other issues, such as and the H1B visa.
“I am a near-constant reminder of the drama that Trump can manufacture (directly or indirectly) on seemingly mundane functions of government,” Tom Essaye, founder and president of Sevens Report Research, wrote in a note to clients on 31 December. .
“This is important because the Republicans have a tiny majority in the House and a small majority in the Senate and this drama raises the concern that pro-growth initiatives will be derailed by this internal struggle and the more these types of episodes, the more markets will begin to doubt the realization of pro-growth hopes,” he added.
Higher for longer
Also, while investors like Trump’s plans for deregulation and tax cuts, economists and strategists see his proposals for tariffs and immigration as potentially inflationary, which could keep rates higher interest rates than Wall Street had anticipated.
Fed Chairman Jerome Powell said on November 14 that policymakers have seen no signs to make them want to “rush to lower rates.” And in a press conference last month, Powell said some policymakers had begun to incorporate the potential impact of higher tariffs into their assumptions, but noted it was premature to draw conclusions.
“Monetary policy uncertainty is higher today, and that is likely to remain true for at least several months as the incoming administration implements fiscal and tariff policies,” Dennis DeBusschere of 22V Research wrote in a note. to customers last month.
On the other hand, Wall Street also has reasons for optimism about a second term of Trump – especially that he tends to see the stock market as his report. For traders, the hope is that it will do nothing to damage a market rally.
“Specifically on tariffs, markets are betting that they will be used as a negotiating tactic and not 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 sympathy for the market as a report on his presidency will cause them to reverse course.”
(Updates of the movement index in the second and third paragraphs. Updates chart.)
