Market Sentiment Shifts as Post-Election Rally Fizzles
The stock market’s post-election euphoria has officially worn off, with the S&P 500 dipping below its Election Day close on Monday. As investors grow increasingly anxious about surging bond yields and the prospect of higher inflation, the benchmark index fell to 5,773.31 at intraday lows, erasing the 5.5% gain it had made since Donald Trump’s election win.
Rising Inflation Expectations Weigh on Stocks
The Federal Reserve’s decision to adjust its guidance for rate cuts in 2025 marked a turning point for the market. With the central bank lifting its inflation expectations and lowering its outlook for further easing, cracks began to form in the bull case for investors. The prospect of higher interest rates and Trump’s protectionist policies, which were initially seen as growth-boosting, now seem less certain.
Tariff Plans Spark Inflation Concerns
Trump’s tariff plans, which were initially met with enthusiasm, are now being viewed with skepticism. Economists warn that these plans could lead to higher inflation and interest rates, contradicting the president’s pledge to lower prices. While Trump’s previous tariffs did not lead to significant inflation, experts believe his current plans are more far-reaching and could have a greater impact.
Bond Yields Surge as Rate Cut Hopes Fade
The yield on the 10-year US Treasury surged to 4.794% on Monday, its highest level since late 2023, as interest-rate expectations climbed. The strong December jobs report only added to investors’ concerns, leading to a sharp sell-off in equities. Ed Yardeni, president of Yardeni Research, noted that the report “cemented investors’ sense that the Fed should pause its easing.”
Investor Sentiment Turns Bearish
As a result, investor sentiment has turned decidedly bearish. According to the American Association of Individual Investors’ latest survey, more than 37% of investors are pessimistic about stocks over the next six months, the highest reading in six weeks. Markets are still expecting one or two rate cuts by the end of the year, but the number of forecasts predicting no rate cuts at all is growing.
A Shift in Market Dynamics
The post-election rally’s demise marks a significant shift in market dynamics. As investors reassess their expectations for growth and inflation, the stock market is likely to remain volatile. With the Fed’s next move uncertain and Trump’s policies under scrutiny, investors are bracing for a bumpy ride ahead.
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