(Bloomberg) — It’s the round-trip ticket nobody on Wall Street wanted.
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The S&P 500 Index on Monday briefly dropped below where it ended on Nov. 5, just before Donald Trump was elected president, and closed only barely above that level on Monday. Investors are dumping stocks and rates of interest are climbing as fears grow that inflation stays stubborn and the Federal Reserve could have to pare back its plans for rate cuts this yr to fight it. Friday’s surprisingly strong jobs data only intensified those worries.
The equities benchmark dropped to a low of 5,773.31 earlier within the session, but erased losses to finish 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 winner, posting its best post-Election Day session ever. And it kept climbing for the following month, ultimately rising 5.3% from Nov. 5 to its peak on Dec. 6. It’s down over 4% from that all-time high.
There are several reasons for the autumn: The economic outlook is deteriorating; investors are growing increasingly concerned about high stock valuations; and rising anxiety concerning the Fed’s rate-cut path. Traders have also been sizing up the potential implications of Trump’s proposed policies, which include sweeping tariffs on imported goods and mass deportations of low-wage undocumented staff.
The fear is already showing up within the bond market, where the yield on 20-year Treasuries is above 5% and the 30-year yield popped above the milestone on Friday before slipping just under. Now the policy-sensitive 10-year yield is heading that way, hitting the very best level since late 2023.
Stock market volatility can also be rising with the Cboe Volatility Index, or VIX, hovering around 20, a level that typically indicates angst amongst traders.
“This can be a case of high expectations crashing into reality,” said Michael O’Rourke, chief market strategist at JonesTrading, noting that turning campaign guarantees into policy is an arduous process.
There may be also a growing understanding that tariffs can be a cornerstone policy of the brand new government, something investors typically don’t like, given tariffs are inclined to weigh on growth. “The honeymoon could also be over,” O’Rourke added.
Different Market
One thing that’s clear is Trump enters the White House with a really different stock market than he did in 2017. For starters, valuations were hardly stretched then but are at precarious levels now. The S&P 500 is up over 50% for the reason that end of 2022 after posting gains of greater than 20% for 2 straight years. In 2024 alone, it has notched greater 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 risen just 8.5% over the previous two years.
Rates of interest were also significantly lower then than they at the moment are, which makes generating stock market returns that much more difficult. The ten-year Treasury yield was 2.47% when Trump was inaugurated on Jan. 20, 2017, and the very best it reached during his term was 3.24%. Today, it’s near 4.8%. And the Fed sounds reluctant to aggressively lower rates anytime soon.
The initial exuberance around Trump’s agenda has abated somewhat in recent weeks, especially after the recent turmoil around a possible government shutdown, and signs of disagreements throughout the Republican party on other issues, corresponding to the H1B visa.
“They’re a near-constant reminder of the drama Trump can manufacture (either directly or not directly) on seemingly mundane functions of the federal government,” Tom Essaye, founder and president of Sevens Report Research, wrote in a note to clients on Dec. 31.
“This matters since the Republicans have a minuscule majority within the House and a small majority within the Senate and this drama is increasing concern that pro-growth initiatives can be derailed by this infighting and the longer most of these episodes occur, the more markets will begin to doubt the belief of pro-growth hopes,” he added.
Higher For Longer
As well as, 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 of interest higher for longer than Wall Street had been anticipating.
Fed Chair Jerome Powell said on Nov. 14 that policymakers weren’t seeing signals to make them wish to “hurry to lower rates.” And at a press conference last month, Powell said some policymakers had begun to include the potential impact of upper tariffs into their assumptions, but noted that it was premature to attract any conclusions.
“Monetary policy uncertainty is higher today, and that’s more likely to remain true for a minimum of several months because the incoming administration implements fiscal and tariff policies,” Dennis DeBusschere of 22V Research wrote in a note to clients last month.
Alternatively, Wall Street also has reasons for optimism a couple of second Trump term — specifically that he tends to see the stock market as his report card. For traders, the hope is that he won’t do anything to harm a market rally.
“Specifically on tariffs, markets are betting that they can be used as a negotiating tactic and never a blunt instrument,” David Bahnsen, chief investment officer at Bahnsen Group, said in a phone interview last month. The concept is that “if there’s an opposed market response, then President-elect Trump’s fondness for the market as a report-card on his presidency will cause him to reverse course.”
(Updates index moves in second and third parapraphs. Updates chart.)