- The postelection rally in stocks was officially wiped out on Monday.
- At intraday lows, the S&P 500 was 0.2% below its election-day close.
- Investors are growing skittish over spiking bond yields and the prospect of higher inflation.
The stock-market rally fueled by Donald Trump’s election win — which extended as far as 5.5% — has now been completely wiped out.
The benchmark S&P 500 fell to 5,773.31 at intraday lows on Monday, below its election-day close of 5,782.76 on November 5.
It’s a testament to souring market sentiment as traders brace for higher interest rates and question whether the president-elect’s protectionist policies will be the growth rocket fuel they originally envisioned.
Stock prices began to stumble in mid-December after the Fed adjusted its guidance for rate cuts in 2025. Cracks began to form in the bull case for investors, some of whom were banking on lower rates and Trump’s pro-business stance unleashing a wave of growth in the US economy.
After cutting rates a quarter-point at its December policy meeting, Fed officials lifted their inflation expectations for the coming year and lowered their outlook for further easiing. FOMC members penciled in just 2 rate cuts ahead in 2025 — down from four cuts they saw earlier in the year — sparking a sharp sell-off in equities.
The outlook for rate cuts grew more challenged as traders eyed inflationary risks stemming from some of Trump’s tariff plan, with sentiment over his second-term turning more dour as investors weighed the possibility of higher inflation.
One-year inflation expectations climbed to 2.64% in December, the highest in 6 months, according to the Cleveland Fed. Bond yields also surged as interest rate expectations continued to climb.
Economists have also warned that Trump’s tariff plan could cause inflation and interest rates to rise, despite him pledging to lower prices during his presidency. Trump levied tariffs during his first-term as president without a significant inflation increase, but experts say that his plan this time around is far more wide-reaching, explaining the difference in inflation forecasts.
Investors threw another tantrum last week after a hot December jobs report confirmed that the Fed has little room to cut interest rates next year. The yield on the 10-year US Treasury edged up to 4.794% on Monday, its highest level since late 2023.
“In this context, Friday’s strong employment report only served to cement investors’ sense that the Fed should pause its easing. Both bond and stock markets reacted like the sky was falling,” Ed Yardeni, the president of Yardeni Research, wrote in a note.
Markets are still expecting one to two rate cuts by the end of the year, but forecasts across Wall Street that the Fed may not cut interest rates at all are growing in number.
Meanwhile, over 37% of investors are bearish on stocks over the next six months, according to the AAII’s latest Investor Sentiment Survey, the most pessimistic reading in six weeks.
