NEW YORK (Reuters) – A U.S. stock rally sparked by Donald Trump’s election victory is faltering as investors grapple with everything from renewed inflation worries to uncertainty about the impact of the president-elect’s policies.
The S&P 500 fell 2% last week, erasing more than half of its gains as a post-election surge fueled in part by optimism about the pro-growth policies that are a key part of Trump’s economic platform.
Although the index is near record highs and is up 23% this year, some of that enthusiasm has dimmed in recent days.
Bets that some of Trump’s policies could fuel a recovery in inflation and cloud the picture of further rate cuts helped push the U.S. 10-year yield to its highest level in more than five months on Friday, a potentially undesirable development for shares.
Concerns over Trump’s Cabinet selection and plans to reduce bureaucratic excesses have bruised shares of pharmaceutical companies and government contractors. Meanwhile, Wall Street has little clarity on when and to what extent the president-elect will implement his agenda.
As the market rushed to price in the positive results of Trump’s economic policies, “I’m skeptical that it will be that easy,” said Paul Nolte, senior wealth advisor and market strategist at Murphy & Sylvest Wealth Management.
A Trump spokesperson did not immediately respond to a request for comment.
Trump has previously said that his trade policy — which calls for costly tariffs on goods not only from rivals like China but also from allies like the European Union — would revive U.S. manufacturing and raise enough revenue to offset concerns about inflating the budget deficit or eliminating rising inflation.
Rising yields are one of the market’s biggest concerns because they provide investment competition for stocks while raising the cost of capital for companies and consumers.
The benchmark 10-year yield – which typically moves with interest rate expectations – has risen about 90 basis points since mid-September, as investors have trimmed their bets on how deeply the Federal Reserve will cut borrowing costs in light of the robust growth seen could fuel inflationary inflation. bounce back.
Until recently, stocks have been able to shrug off the rise in yields as it was driven by stronger-than-expected economic data. But many of Trump’s policies — from tax cuts to tariffs — are seen as inflationary and could keep interest rates rising above the 4.5% level that some investors have identified as a potential trigger for stock market turmoil.
The yield topped 4.5% on Friday before falling lower.
“If yields continue to rise and don’t reach their ceiling, I think this will become a problem because it will actually translate into a tighter monetary environment,” said Irene Tunkel, chief U.S. equity strategist at BCA Research.
Fed Chairman Jerome Powell said Thursday there is little need for policymakers to rush to cut rates, given solid economic growth and inflation above the central bank’s 2% target. The comments weighed on stocks and pushed bond yields higher.
As yields have risen, the relative attractiveness of stocks compared to U.S. Treasury bonds, which are considered risk-free if held to maturity, has declined by some measures.
The equity risk premium, which compares the S&P 500’s earnings yield to the 10-year Treasury yield, is at its lowest level since mid-2002, said Keith Lerner, co-chief investment officer at Truist Advisory Services.
POLICY UNCERTAINTY
Uncertainty about the timing and ultimate impact of Trump’s policies has also increased.
Shares of Pfizer, Moderna and other drugmakers fell late last week after Trump fired vaccine skeptic Robert F. Kennedy Jr. had chosen to lead the Department of Health and Human Services.
Shares of defense and government contractors including Leidos Holdings and General Dynamics also fell as investors worried about the impact of a new government efficiency entity led by Tesla CEO Elon Musk.
Kennedy, a Cabinet pick, has yet to be confirmed by Senate lawmakers, while the extent of any cuts from the efficiency entity is unclear.
Still, the uncertainty has prompted some investors to “sell first and ask questions later,” said King Lip, chief investment strategist at BakerAvenue Wealth Management.
Meanwhile, strategists at BofA Global Research said risks to their forecast of 2.3% economic growth next year were “very high in both directions” given the lack of clarity over which aspects of Trump’s policies will be prioritized.
Growth could rise above 3% if the government focuses on fiscal easing and deregulation, the bank’s strategists wrote on Friday. But a sharp change in direction could ignite a trade war and ultimately plunge the economy into recession, they said.
Of course, some so-called Trump trades are still showing huge profits. Tesla shares, which have soared on bets that Musk’s close partnership with the newly elected president will benefit the company, have risen 28% since Election Day.
Bitcoin, lifted by hopes of crypto deregulation, rose more than 30% late Friday.
At the same time, stocks tend to perform well at the end of the year, with the S&P 500 up an average of 3.3% in the last two months of presidential elections since 1952, according to Truist’s Lerner.
That’s reason for continued optimism, along with strong corporate earnings and a healthy growth backdrop, said Ross Mayfield, investment strategist at Baird Private Wealth Management.
“There’s a lot more that’s working for the market,” Mayfield said.
(Reporting by Lewis Krauskopf in New York; Editing by Ira Iosebashvili and Matthew Lewis)
