Amid predictions that the Federal Reserve will not cut interest rates as much as anticipated, the post-Election Day surge in stock prices is waning.
The tech-heavy Nasdaq was down as high as 1% before Monday’s opening bell, while the Dow Jones Industrial Average was on track to open.10% lower and the wider S&P 500 was down 0.65%.
For the first time, S&P 500 futures officially opened below their levels on November 6, 2024.
Donald Trump, the president-elect, had hoped that his win to a second term would maintain the record-high market prices throughout the Biden administration and spark a fresh wave of business optimism.
However, the post-election surge has been comparatively brief due to worries about the long-term budgetary situation for the United States and fears that price increases may resume.
Interest rates are at the center of everything.Wall Street traders have revised their interest-rate outlook for 2025 in response to a blowout jobs report released Friday, which showed that the U.S. economy added 256,000 payrolls in December. There is now a new consensus that rates will not drop as much as previously predicted and may even need to rise again if inflation picks back up.
In a letter to clients on Monday, Bank of America analysts stated that the labor market currently seems to have stabilized, activity is robust, inflation is stuck over goal, and risks are tilted to the upside. Although the Fed is on an extended hold in our base case, we believe that the odds are in favor of a rise as the following action.
There is less space for traders to borrow money to purchase equities when interest rates rise.
Another indication that inflation concerns are resurfacing is the fact that markets also increased the cost of borrowing money for the US. Since the prices of so-called fixed income instruments, such as bonds, are predetermined, they lose value when economic prices rise. Interest rates and borrowing costs typically fluctuate together.
Regarding how he would improve the U.S. fiscal future, Trump has given conflicting signals. He has promised a combination of tax cuts and expenditure cutbacks, which many believe would be politically challenging to implement. Reduced investor interest in U.S. treasuries would make Trump’s fiscal agenda more difficult, even if he has already called for an increase in the debt limit to enable the United States to continue borrowing money to fund his budget plans.
Additionally, markets have been considering the possible effects of Trump’s proposed tariffs, and it is generally agreed that they will raise prices.
“Progress on inflation should stall this year given our expected changes to trade, fiscal and immigration policy,” the analysts at BofA stated. “Our recent survey of fundamental analysts revealed concerns about higher inflation this year if tariffs are imposed, with a skew towards goods sectors.”
The so-called producer pricing index and the more general consumer price index are the two sets of price data that Wall Street traders will receive this week. Although it was anticipated that both would have been relatively stable between November and December, any data indicating quicker-than-anticipated growth might further strain markets.