(Bloomberg) — It's the round-trip ticket no one on Wall Street wanted.
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The S&P 500 Index on Monday fell briefly below where it ended on November 5, just 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 mount that inflation remains stubborn and the Federal Reserve will have to scale back its plans for rate cuts this year to combat it. Friday's surprisingly strong jobs data only exacerbated those concerns.
The equities benchmark fell to a low of 5,773.31 earlier in the session, but erased losses to end the day slightly 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 November 6 after Trump was declared the winner, posting its best-ever Election Day session. And it continued to climb for the next month, eventually rising 5.3% from November 5 to its peak on December 6. It is down over 4% from that all-time high.
There are several reasons for the fall: The economic outlook is deteriorating; investors are increasingly concerned about high stock valuations; and growing concern about the Fed's rate cut path. Traders have also been summarizing the potential implications of Trump's proposed policies, which include sweeping tariffs on imported goods and mass deportations of low-wage undocumented workers.
The fear is already showing in the bond market, where the yield on 20-year Treasuries is above 5% and the 30-year yield is above the milestone on Friday before slipping slightly lower. Now the policy-sensitive 10-year yield is heading that way, hitting the 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 angst 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 policy is a laborious process.
There is also a growing understanding that tariffs will be one of the cornerstone policies of the new government, something that investors do not usually like, given that tariffs tend to weigh on growth. “Maybe the honeymoon is over,” added O'Rourke.
A different market
One thing that is clear is that Trump is entering the White House with a very different stock market than it did in 2017. Initially, valuations were low at the time but are now at precarious levels. The S&P 500 is up over 50% since the end of 2022 after posting gains of more than 20% for two straight years. In 2024 alone, it has set 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 risen just 8.5% over the previous two years.
Interest rates were also significantly lower than they are now, which makes 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 term was 3.24%. Today, it is close to 4.8%. And the Fed sounds reluctant to cut rates aggressively anytime soon.
The initial exuberance about Trump's agenda has waned somewhat in recent weeks, especially after the recent turmoil over a possible government shutdown, and signs of disagreements within the Republican party on other issues, such as the H1B visa.
“They are an almost constant reminder of the drama that Trump can produce (either directly or indirectly) on seemingly mundane functions of government,” wrote Tom Essaye, founder and president of Sevens Report Research, in a note to clients on December 31. .
“This is important because the Republicans have a small majority in the House and a small majority in the Senate and this drama is a growing concern that growth initiatives will be hindered by these fights and the longer these kinds of of episodes occur, the more markets there will be. began to doubt the realization of pro-growth hopes,” he added.
Higher For Longer
Additionally, 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 interest rates higher for longer than they have been Wall Street has been predicting it.
Fed Chairman Jerome Powell said on November 14 that policymakers saw no signs to make them want to “rush to lower rates.” And in a press conference last month, Powell said that some policymakers had begun to incorporate the potential impact of higher tariffs into their assumptions, but noted that it was 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 tariff policies,” Dennis DeBusschere of 22V Research wrote in a note to clients last month.
On the other hand, Wall Street also has reasons for optimism about Trump's second term – specifically that he tends to see the stock market as his report card. For traders, the hope is that it won't do anything 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 fondness for the market as a report card on his presidency will cause him to reverse course.”
(Updates index moves in the second and third paragraphs. Chart updates.)
