Donald Trump often cited the stock market as a barometer of his presidency’s success. However, as he embarks on his second term, interest rates are poised to become a dominant market force, largely outside his control.
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Since Trump’s November 5th election, the 10-year Treasury yield (^TNX) has surged roughly 40 basis points. This reflects market anticipation of fewer Federal Reserve rate cuts, fueled by concerns that inflation won’t readily recede to the central bank’s 2% target.
Nearing 4.8%, the yield sits at its highest point since late April 2024, exceeding levels where strategists believe elevated rates dampen investor appetite for stocks. Similar rate increases in April 2024 and the fall of 2023 coincided with significant stock market downturns during the current bull market.
For instance, when the 10-year yield approached 5% in the fall of 2023, the S&P 500 (^GSPC) endured a three-month consecutive decline, shedding up to 10% of its value.
“The correlation between equity returns and bond yields has reversed sharply, becoming negative (rising yields, falling stocks, and vice versa) – a phenomenon unseen since last summer,” observed Morgan Stanley Chief Investment Officer Mike Wilson in a January 5th client note.
This inverse relationship between stock performance and rising rates underscores Wilson’s assertion that interest rates constitute “the most crucial variable to monitor in early 2025.”
Trump’s Limited Influence on Interest Rates
The predicament for Trump lies in his limited ability to influence lower rates. Many of his publicly discussed policies have even exerted an opposite effect. On January 6th, for example, when Trump refuted a Washington Post report suggesting his tariff plans might be less extensive than initially projected, yields spiked, reversing an earlier decline.
Inflationary Pressures and the Federal Reserve’s Stance
A prevailing market concern is the potential for tariffs to exacerbate inflation, already struggling to align with the Fed’s 2% target. The central bank has initiated discussions on how Trump’s policies could impact future interest rate cuts in 2025.
Federal Reserve officials largely concurred in their last meeting that “upside risks to the inflation outlook had increased,” partly attributed to the “likely effects” of anticipated changes in trade and immigration policies, as documented in the minutes from the Fed’s December 18th meeting.
Jurrien Timmer, Director of Global Macro at Fidelity Investments, expressed his primary apprehension to Yahoo Finance: “The inflation genie was never truly contained.”
He elaborated, “If economic growth accelerates significantly without fully subduing inflation, we could witness a resurgence from the current high twos back into the threes, potentially reaching three and a half or four percent. This isn’t a prediction, but a plausible scenario that could deter the Fed from further rate cuts.”
The Fed’s Independence and Market Speculation
The Federal Reserve’s independence prevents Trump from directly mandating rate cuts to alleviate pressure on rising bond yields. Fed Chair Jerome Powell has firmly stated his resistance to directives from the incoming president.
Consequently, the onus of addressing rising rates, deemed a “systemic problem” for equities by strategists, falls upon the markets, which will continue to speculate on the Fed’s next moves.
Economic Data and Market Sentiment
Many anticipate that a series of weaker economic data points could finally temper the upward trajectory of rates. Michael Kantrowitz, Chief Investment Strategist at Piper Sandler, suggested in a recent client video that this shift away from a rising rate environment could reignite equity market momentum.
However, this hasn’t materialized yet. A robust December employment report propelled rates higher and stocks lower, as investors gained confidence that the Fed might not need to resort to rate cuts to bolster a struggling economy.
