Donald Trump is known to use the stock market to measure his success in office.

But in the first year of his second term, Trump may have little control over next year’s key market driver: interest rates.

The 10-year Treasury yield (^TNX) has risen about 40 basis points since Trump was elected on Nov. 5 as markets price in fewer Fed rate cuts and worry that inflation will not fall quickly to central bank levels. 2% target.

The yield is just below 4.8%, at its highest level since late April 2024 and above where strategists believe rising interest rates will affect investors' willingness to buy stocks. Similar rate increases in April 2024 and fall 2023 coincided with some of the biggest stock market declines in the current bull market.

For example, the last time the 10-year Treasury note rose nearly 5%, in the fall of 2023, the S&P 500 Index (^GSPC) fell for three consecutive months, with the benchmark index falling as much as 10% over the same period.

"The correlation between stock returns and bond yields has turned decidedly negative (as yields rise, stocks fall, and vice versa)," Morgan Stanley Chief Investment Officer Mike Wilson wrote in a note to clients. (Also) - This is something we haven't seen since last summer." January 5.

Given this correlation of stocks falling when interest rates rise, Wilson believes interest rates are the "most variable to watch in 2025."

The problem for Trump is that there is little the president-elect can do to influence lower interest rates.

In fact, many of his policies, at least when talked about publicly, had adverse effects. Take the market trend on January 6 as an example. Yields surged and reversed an earlier decline when Trump denied a Washington Post report that his tariff plan might not be as widespread as first thought.

A major concern for many market participants is that tariffs could stoke inflation at a time when inflation is already struggling to fall to the Fed's 2% target. The central bank has begun discussing how Trump's policies will affect whether to cut interest rates further in 2025.

Nearly all Fed officials agreed at their last meeting that "upside risks to the inflation outlook have increased," in part due to the "possible impact" of expected changes in trade and immigration policy, according to the minutes of the Fed's Dec. 18 meeting.

Jurrien Timmer, global director of macro at Fidelity Investments, told Yahoo Finance that his "main concern" is that "the inflation genie is never quite put back in the bottle."

The story continues