The U.S. stock market’s rise after the election hit a snag. After going through a big jump after Donald Trump won the election on November 5, it was probably due for a slowdown. The only question was what would set it off.
Federal Reserve Chair Jerome Powell stepped up during a Thursday event in Dallas.
Powell told investors that the Fed wasn’t in a hurry to cut interest rates again because the economy was doing well. He said a lot of the same things he said after the Fed cut rates again on November 7, this time by 25 basis points. This was the second rate cut in October, by 50 basis points.
But investors didn’t seem to react the same way, since they weren’t feeling as happy after the election. This made them worry about how fast the Fed will cut rates in the future and what the future holds for market interest rates. These things, along with how they fit with Trump’s economic plans, will likely sway markets in the coming weeks.
After Powell’s comments on Thursday, major stock markets continued to lose small amounts of value. As of Friday, they were all sharply down. The tech-heavy Nasdaq Composite COMPP -2.24% was down 3.3%, the Dow Jones Industrial Average DJIA -0.70% was down 1.3% for the week, and the S&P 500 SPX -1.32% was down 2.2%. The Russell 2000 small-cap index RUT -1.42%, which has been a big winner in so-called Trump trades, fell more than 4% this week.
The drop comes after the best week for U.S. stocks in 2024. For the week ending November 8, the S&P 500 is up 1.5%, the Dow is up 2.9%, and the Nasdaq is up 1.3%. During that time, the small-cap Russell has gone up 1.9%.
Additionally, Powell’s comments came after U.S. inflation data that stayed a bit higher than what was predicted earlier in the week. They came after other Fed officials said it was clear that a rate cut in December isn’t a done deal. When Treasury yields went up, they sped up their rise that started after Trump’s victory, and stocks soon felt the heat.
“Until now, the markets haven’t cared about the rate hike. The S&P 500 has gone up 6% since 10-year yields hit their lowest point two months ago.” Larry Adam, chief financial officer at Raymond James, said in a Friday note, “If the 10-year Treasury yield breaks below 4.5%, the stock market could come under pressure and lead to a near-term pullback.”
In fact, the yield on the 10-year note did briefly trade above 4.5% on Friday before buyers came in and kept it there until the end of the day, when it was close to 4.46%.
Adam says that yields won’t be a long-term issue for stocks “as long as earnings continue to rise and the economy has a soft landing.”
According to a note by rates analysts Ian Lyngen and Vail Hartman at BMO Capital Markets, stock market investors may still be vulnerable to changes in the bond market in the near future.
The link between higher Treasury yields and market tremors will be the main topic of discussion over the next few sessions. The authors wrote, “If nothing else, the lack of top-level data will make investor sentiment vulnerable to changes in other asset classes.”
In turn, what investors think about Trump’s plans will determine what the future holds for prices. Analysts have disagreed on how much of the rise in yields since the end of September can be attributed to worries about Trump’s policies that could cause prices to rise again, such as tariffs on imports, tax cuts, and continued government deficit spending.
Powell said again that officials don’t make assumptions about fiscal policy and other measures. However, Fed watchers and rates strategists wonder if the Fed wants to give itself more options for how fast and how far it can cut interest rates.
Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, said in a Friday note that Fed officials “will already be thinking about possible reflationary shocks, market inflation break-evens, changing financial conditions, and less visibility into 2025.”
He wrote, “We think this makes them more sensitive to surprises on the upside in spot inflation data while also adding to Trump-related worries about “data dependence” that they can’t talk about openly.”
He said that’s still in line with the Fed cutting rates by another quarter percentage point in December. As time goes on, the cuts will slow down to one quarter-point cut every three months in 2025. It is still possible for the fed-funds rate to drop below 4%, but it is less clear when and how much it will drop. And that should make investors less interested in risky assets in the short term.
The Federal Reserve will value flexibility as a safeguard against Trump’s doubt, even in the most likely scenario, Guha wrote. So this is less risk-friendly, even if the baseline is not as bearish as some fear. This is because risk-takers are short the same option when the Fed is long it.
