Headwinds Hit Trump-Fueled Rally in US Stocks
The U.S. stock rally that surged in response to Donald Trump’s election victory is stumbling, as investors grapple with economic headwinds ranging from inflation concerns to uncertainty regarding the president-elect’s policy implementations. The S&P 500 has seen a 2% decline over the past week, which has effectively erased more than half of its post-election gains driven by optimism surrounding Trump’s pro-growth economic platform.
Despite the index remaining near record highs and showing a robust 23% increase for the year, recent fluctuations have tempered some of the initial enthusiasm. Concerns have mounted regarding how Trump’s proposed policies might influence inflation, which in turn has clouded prospects for further interest rate cuts. These factors contributed to the U.S. 10-year yield reaching its highest level in over five months, a potentially negative signal for equity markets.
Navigating Rising Yields
Rising yields are currently among the primary concerns of investors, as they present competition for equities and elevate the cost of capital for both companies and consumers. The benchmark 10-year yield surged about 90 basis points since mid-September, coinciding with a decrease in investor confidence concerning how aggressively the Federal Reserve may cut borrowing costs. This uptick comes amid robust economic data that could signal a resurgence in inflation.
Until recently, stocks seemed insulated from yield increases, as they were primarily driven by strong economic indicators. However, many of Trump’s proposed policies—such as tax cuts and tariffs—are perceived as inflationary. Investors are now wary that these developments could push yields beyond the 4.5% threshold, which has been tagged as a potential trigger for market unease. The yield briefly touched 4.5% on Friday before retreating slightly.
“If yields continue to trend up and they don’t find their ceiling, I think it will become a problem because it will basically translate into a tighter monetary environment,” stated Irene Tunkel, chief U.S. equity strategist at BCA Research. On a related note, Federal Reserve Chair Jerome Powell indicated on Thursday that there’s little urgency to cut rates given solid economic growth and inflation levels that exceed the central bank’s 2% target. Such remarks contributed to a downward trend in stocks and pushed bond yields higher.
Equity Risk and Market Uncertainty
As yields have climbed, the appeal of equities in comparison to U.S. government bonds—considered a risk-free investment if held to term—has diminished. Notably, the equity risk premium, which assesses the S&P 500 earnings yield in relation to the 10-year Treasury yield, has reached its nadir since mid-2002, according to Keith Lerner, co-chief investment officer at Truist Advisory Services.
Moreover, uncertainty surrounding the timing and potential impacts of Trump’s policies has further complicated the investment landscape. Shares of major pharmaceutical companies like Pfizer and Moderna saw declines after Trump nominated known vaccine skeptic Robert F. Kennedy Jr. to lead the Department of Health and Human Services. Additionally, defense contractors such as Leidos Holdings and General Dynamics faced sell-offs amid concerns regarding a proposed government efficiency initiative overseen by Tesla CEO Elon Musk.
The lack of clarity regarding these developments has led some investors to adopt a “sell first, ask questions later” mentality, as described by King Lip, chief strategist at BakerAvenue Wealth Management. Meanwhile, strategists from BofA Global Research highlighted that the risks to their 2.3% economic growth forecast for the coming year are significantly pronounced given the uncertain priorities of Trump’s administration. A focus on fiscal easing and deregulation could propel growth beyond 3%, while a hard pivot to tariffs might instigate a trade war, risking a recession.
Trump Trades Still Booming
Despite the prevailing uncertainties, some of the so-called Trump trades continue to exhibit substantial gains. Shares of Tesla have surged 28% since Election Day, buoyed by speculation that Musk’s close ties with the president-elect will yield benefits for the company. Cryptocurrencies, particularly Bitcoin, have also gained traction—up over 30% as of Friday, fueled by hopes of favorable crypto deregulation.
In conclusion, while the U.S. stock market initially responded positively to Trump’s election, the current environment presents a complex tapestry of inflation concerns, rising yields, and policy uncertainty. As investors maneuver through these challenges, the future trajectory of the market remains uncertain, highlighting the importance of vigilance in an ever-changing financial landscape.