(Bloomberg) — It’s the round-trip ticket no one 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 slightly above that level on Monday. Investors are dumping stocks and interest rates are climbing as fears grow that inflation remains stubborn and the Federal Reserve will have to pare back its plans for rate cuts this year 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 in the session, but erased losses to end 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 next 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 fall: The economic outlook is deteriorating; investors are growing increasingly concerned about high stock valuations; and rising anxiety about 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 workers.
The fear is already showing up in 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 below. Now the policy-sensitive 10-year yield is heading that way, hitting the highest level since late 2023.
Stock market volatility is also rising 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 an arduous process.
There is also a growing understanding that tariffs will be a cornerstone policy of the new government, something investors typically do not like, given tariffs tend to weigh on growth. “The honeymoon may be over,” O’Rourke added.
Different Market
One thing that’s clear is Trump enters the White House with a very 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% since the end of 2022 after posting gains of more than 20% for two straight years. In 2024 alone, it has notched 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 then than they are now, which makes generating stock market returns that much more challenging. The 10-year Treasury yield was 2.47% when Trump was inaugurated on Jan. 20, 2017, and the highest 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 potential government shutdown, and signs of disagreements within the Republican party on other issues, such as the H1B visa.
“They are a near-constant reminder of the drama Trump can manufacture (either directly or indirectly) on seemingly mundane functions of the government,” Tom Essaye, founder and president of Sevens Report Research, wrote in a note to clients on Dec. 31.
“This matters because the Republicans have a minuscule majority in the House and a small majority in the Senate and this drama is increasing concern that pro-growth initiatives will be derailed by this infighting and the longer these types of episodes occur, the more markets will begin to doubt the realization of pro-growth hopes,” he added.
Higher For Longer
In addition, 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 Wall Street had been anticipating.
Fed Chair Jerome Powell said on Nov. 14 that policymakers weren’t seeing signals to make them want to “hurry to lower rates.” And at a press conference last month, Powell said 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 that is likely to remain true 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 a 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 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 second and third parapraphs. Updates chart.)
