Stocks on edge to erase Trump gains as interest rate worries set in

(Bloomberg) — It’s the round-trip ticket no one on Wall Street wants.

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The S&P 500 briefly fell below its closing price on November 5, before Donald Trump was elected president, before closing just above that level on Monday. Investors are selling stocks and interest rates are climbing amid growing concerns that the Federal Reserve will have to scale back its plan to cut interest rates this year to combat inflation as it remains stubborn. Friday's unexpectedly strong jobs data only heightened those concerns.

Earlier in the session, the stock market benchmark fell to a low of 5,773.31 points but recovered losses to close slightly higher at 5,836.22 points. Ahead of Election Day vote counting, the S&P 500 closed at 5,782.76. The index rose 2.5% on Nov. 6, its best post-Election Day performance ever, after Trump was declared the winner. It continued to climb over the next month, eventually rising 5.3% from November 5 to a peak on December 6. It is down more than 4% from its all-time high.

There are several reasons for the decline: a deteriorating economic outlook; growing concerns among investors about high stock valuations; and growing concerns about the Fed's path to cutting interest rates. Traders have also been assessing the potential impact of Trump's proposed policies, which include sweeping tariffs on imported goods and mass deportations of low-wage undocumented workers.

That concern is already showing up in the bond market, with 20-year Treasury yields above 5% and 30-year Treasury yields surpassing that milestone on Friday before falling just below that level. Now, the policy-sensitive 10-year Treasury yield is moving in that direction, hitting its highest level since late 2023.

Stock market volatility is also on the rise, with the CBOE Volatility Index (VIX) hovering around 20, a level that typically signals anxiety among traders.

“This is a case of high expectations meeting reality,” said Michael O'Rourke, chief market strategist at JonesTrading, noting that translating campaign promises into policy is an arduous process.

There is growing recognition that tariffs will be a cornerstone policy of the new administration, but investors generally dislike this because tariffs tend to be a drag on economic growth. “The honeymoon may be over,” O'Rourke added.

different markets

One thing is clear, the stock market is very different when Trump is in the White House than it was in 2017. First, valuations had barely risen at the time but are now at precarious levels. The S&P 500 has risen more than 50% since the end of 2022, following two consecutive years of gains of more than 20%. In 2024 alone, it set more than 50 records. Compared with Trump's first term, when the S&P 500 rose 9.5% in 2016, it has risen just 8.5% over the past two years.

Interest rates were also significantly lower then than they are now, making generating stock market returns more challenging. When Trump took office on January 20, 2017, the 10-year Treasury bond yield was 2.47%, and the highest during his term was 3.24%. Today, that number is closer to 4.8%. And the Fed seems unwilling to lower interest rates significantly in the short term.

Initial enthusiasm around Trump's agenda has waned in recent weeks, especially after recent unrest over a potential government shutdown and signs of divisions within the Republican Party over other issues such as H1B visas.

“They serve as a near-constant reminder of the power Trump can create (directly or indirectly) in seemingly mundane functions of government,” Tom Essaye, founder and president of Sevens Report Research, wrote in a Dec. 31 note to clients. A dramatic incident occurred.”

“This is important because the drama of Republicans holding a slim majority in the House and a slim majority in the Senate is raising concerns that pro-growth initiatives will be derailed by this kind of infighting, and the longer it goes on, The greater the impact on the market “begins to doubt whether the hope of promoting growth can be realized,” he added.

taller and longer

Additionally, while investors like Trump's plans for deregulation and tax cuts, economists and strategists believe his tariffs and immigration proposals could stoke inflation, which could keep interest rates higher for longer than Wall Street expected longer.

Federal Reserve Chairman Jerome Powell said on November 14 that policymakers have seen no signals that would make them want to “rush to lower interest rates.” Powell said at a news conference last month that some policymakers have begun incorporating the potential impact of higher tariffs into their assumptions, but noted it was too early to draw any conclusions.

“Uncertainty over monetary policy is higher now and as the incoming administration implements fiscal and tariff policy, this situation is likely to continue for at least a few months.”

Wall Street, on the other hand, has reason to be optimistic about Trump's second term — particularly his tendency to view the stock market as his report card. For traders, the hope is that he doesn't do anything to hurt the market's rebound.

“Especially on tariffs, the market is betting that tariffs will be used as a negotiating tactic rather than as a blunt tool,” David Bahnsen, chief investment officer at Bahnsen Group, said in a phone interview last month. The idea is, “If the market does If there is an adverse reaction, then President-elect Trump’s fondness for the market will be the report card of his presidency, which will cause him to change course.”

(Updated index trends in second and third paragraphs. Updated charts.)