(Bloomberg) — It’s the pass no one on Wall Street wanted.
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The S&P 500 index briefly dipped below where it ended on Nov. 5, just before Donald Trump was elected president, and closed Monday just above that level.Investors are dumping stocks and interest rates are rising because fears are growing that inflation remains stubborn and the Federal Reserve will have to scale back its plans to cut interest rates this year to combat it in Friday’s surprise strong jobs data only heightened those concerns.
The benchmark fell to an early session low of 5,773.31, but erased losses to end the day modestly higher at 5,836.22.The S&P 500 closed at 5,782.76 on Nov. 6 % after Trump emerged victorious, posting his best session of the post-election day ever. And it continued to climb over the next month, eventually rising 5.3% from its peak on December 6. It’s down more than 4% from this all-time high.
There are several reasons for the decline. the economic outlook worsens. investors are increasingly worried about the high valuation of stocks; and growing anxiety about the Fed’s path to rate cuts.Traders are also weighing the potential consequences of Trump’s proposed policies, which include higher tariffs on imported goods and mass deportations of low-wage undocumented workers.
Fear is already showing in the bond market, with the 20-year Treasury yield above 5% and the 30-year yield rising above the mark on Friday before slipping just below direction, reaching the highest level since late 2023.
Stock market volatility is also on the rise with the Cboe Volatility Index, or VIX, hovering around 20, a level that usually indicates anxiety among traders.
“This is a case of great expectations being crushed by reality,” said Michael O’Rourke, chief market strategist at JonesTrading, noting that turning campaign promises into policy is a difficult process.
There is also a growing sense that tariffs will be a cornerstone policy of the new government, something that investors generally don’t like, 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 he did in 2017. Valuations barely budged then, but the S&P 500 is now at volatile levels, higher since late 2022 by more than 50% after posting gains of more than 20% in 2024 alone recorded more than 50 records. Compare that to Trump’s first term, when the S&P 500 was up 9.5% in 2016 and up just 8.5% over the previous two years.
Interest rates were also significantly lower then than they are now, making it much more difficult to generate stock market returns.The 10-year Treasury yield was 2.47% at Trump’s inauguration on January 20, 2017, the highest it had been in his tenure. during this period, it was 3.24%. Today it’s around 4.8%, and the Fed doesn’t want to cut rates aggressively anytime soon.
The initial fervor around Trump’s agenda has waned somewhat in recent weeks, especially after recent turmoil over a potential government shutdown and signs of division within the Republican Party over other issues, such as H1B visas.
“They are an almost constant reminder of the drama that Trump can create (directly or indirectly) on the seemingly mundane functions of government,” Tom Essay, founder and president of Sevens Report Research, wrote in a Dec. 31 note to clients. .
“This is important because Republicans have a small majority in the House of Representatives and a small majority in the Senate, and this drama raises concerns that pro-growth initiatives will be derailed by these infighting, and the longer these kinds of episodes go on, the more markets will start.” doubted the fulfillment of pro-growth hopes,” he added.
Longer higher
Also, while investors like Trump’s plans for deregulation and tax cuts, economists and strategists see his proposals on tariffs and immigration as potentially inflationary, which could keep interest rates down longer than Wall Street expected.
Fed Chairman Jerome Powell said on Nov. 14 that policymakers see no signs that would prompt them to “rush to lower rates.” And at a press conference last month, Powell said that some policymakers have begun to factor in the potential impact of higher rates in speculation, but noted that it is premature to draw any conclusions.
“Monetary policy uncertainty is higher today and is likely to remain so for at least several months as the incoming administration implements fiscal and rate policy,” Dennis DeBusschere of 22V Research wrote in a note to clients last month.
On the other hand, Wall Street also has reasons to be optimistic about Trump’s second term, particularly because he tends to see the stock market as his report card.
“Especially on tariffs, the 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 love of the market as a report card for his presidency will force him to reverse course.”
(Index of Updates moves in second and third paragraphs. Chart of Updates.)
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