(Bloomberg) — It’s the round-trip ticket that no one on Wall Street wanted.
Most read from Bloomberg
The S&P 500 on Monday briefly fell below where it finished on November 5, just before Donald Trump was elected president, and closed just above that level on Monday. Investors are dumping stocks and interest rates are rising as fears grow that inflation remains stubborn and the Fed will have to scale back its plans to cut interest rates this year to combat it. Surprisingly strong jobs data on Friday heightened those concerns.
The stock index fell 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 Standard & Poor’s 500 Index closed at 5,782.76 points. It then jumped 2.5% on November 6 after Trump’s victory was announced, marking its best session ever after Election Day. It continued to rise for the next month, eventually rising 5.3% from November 5 to its peak on December 6. It is more than 4% below its all-time high.
There are several reasons for this decline: deteriorating economic outlook; Investors are increasingly concerned about high stock valuations; Concern has grown about the Fed’s interest rate cutting path. Traders are also weighing the potential ramifications of Trump’s proposed policies, which include sweeping tariffs on imported goods and the mass deportation of low-wage undocumented workers.
The fear is already showing in the bond market, where the yield on 20-year Treasuries exceeds 5%, and the yield on 30-year Treasuries rose above the important level on Friday before falling just below that. Now the policy-sensitive 10-year bond yield is heading in that direction, 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 usually indicates anxiety among traders.
“This is a case of high expectations colliding with 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 understanding that tariffs will be a cornerstone policy for the new government, something investors typically do not like, given that tariffs tend to weigh on growth. “The honeymoon may be over,” O’Rourke added.
Different market
One thing that is clear is that Trump enters the White House with a very different stock market than it was in 2017. To begin with, valuations were not nearly as stretched then but are at risky levels now. The S&P 500 is up more than 50% since the end of 2022 after posting gains of more than 20% for two straight years. In 2024 alone, it achieved more than 50 records. Compare that to Trump’s first term, when the S&P 500 gained 9.5% in 2016, then rose just 8.5% over the previous two years.
Interest rates were also much lower than they are now, making generating stock market returns much more difficult. The ten-year Treasury yield was 2.47% when Trump was inaugurated on January 20, 2017, and the highest level he reached during his term was 3.24%. Today it is close to 4.8%. The Fed appears reluctant to cut interest rates aggressively any time soon.
The initial enthusiasm around Trump’s agenda has cooled somewhat in recent weeks, especially after recent unrest over a potential government shutdown, and signs of disagreements within the Republican Party on other issues, such as the H1B visa.
“It is a near-constant reminder of the drama Trump can create (either directly or indirectly) over the seemingly mundane tasks of government,” Tom Isay, founder and president of Sevens Report Research, wrote in a note to clients dated Dec. 31. .
“This is important because Republicans have a narrow majority in the House of Representatives and a small majority in the Senate, and this drama increases concern that pro-growth initiatives will be derailed by this infighting, and the longer these types of events drag on, the more markets will lose,” he added. “We are beginning to doubt the fulfillment of growth hopes.”
higher for longer
Additionally, while investors like Trump’s plans for deregulation and tax cuts, economists and strategists say his proposals on tariffs and immigration could lead to inflation, which could keep interest rates higher for longer than Wall Street expected.
Federal Reserve Chairman Jerome Powell said on November 14 that policymakers have not seen signs that make them want to “accelerate rate cuts.” At a news conference last month, Powell said some policymakers were beginning to incorporate the potential impact of higher tariffs into their assumptions, but noted that it was too early to draw any conclusions.
“Monetary policy uncertainty is higher today, and this is likely to remain true for at least several months as the next administration implements fiscal and tariff policies,” Denis 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 — especially since he tends to see the stock market as his report card. For traders, the hope is that it won’t do anything to hurt the market’s rise.
“On tariffs specifically, markets are betting that they will be used as a negotiating tactic rather than 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 a negative market reaction, President-elect Trump’s penchant for the market as an account of his presidency will prompt him to reverse course.”
(The updates cursor moves in the second and third paragraphs. Updates chart.)
Most read from Bloomberg Businessweek
©2025 Bloomberg LP