The markets are sending Trump a message
During the first month after Election Day in November, the S&P (^GSPC) stock index rose a nifty 5.3%. Investors cheered incoming President Donald Trump, who promised fiscal stimulus in the form of tax cuts, plus business-friendly deregulation and other measures likely to juice corporate profits.
Since Dec. 6, however, the S&P 500 has dropped by 4% as investors worry about Trump’s “America first” agenda. The tariffs Trump wants to impose on imports would push prices up, and Trump’s plan to deport migrant workers could push labor costs higher. That’s causing new jitters about a second wave of inflation just as the first wave, which peaked in 2022, seemed to be fading.
Markets may welcome Trump’s inauguration on Jan. 20, since it will end 10 weeks of speculation on Trump’s policies and start to bring clarity about what he actually plans to do. But markets have sent some crucial signals Trump would be wise to heed.
“Trump’s policies entail a complicated mix of favorable and adverse supply shocks and demand shocks,” Citi economists recently wrote in their outlook for 2025. “Bottom line, the uncertainties surrounding Trump’s policies are significant.”
Markets hate uncertainty, of course, and they’re suddenly awash in it.
An economic uncertainty index maintained by economists Scott Baker, Nicholas Bloom, and Steven Davis jumped from 109 in October to 225 in November — the highest level since 2022. In December, it fell to 215, still far above average levels.
So far, “2025 has been turbulent,” Tom Lee of investing firm Fundstrat said in a Jan. 12 video analysis. “There is policy uncertainty coming from the incoming White House. These are the obvious things: tariffs and deportations.”
The Federal Reserve is on edge too. “All participants judged that uncertainty about the scope, timing, and economic effects of potential changes in policies affecting foreign trade and immigration was elevated,” the minutes of the Fed’s December meeting revealed.
If investors and policymakers are confused, it might be because Trump and his team are sending mixed signals. Some Trump advisers are fueling media reports that Trump is paring back his tariff plans. Trump himself refuted that in a social media post. Wall Street is splitting into two camps: one that expects minimal disruption to trade and one that expects a lot more.
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Markets are indicating a couple of specific concerns.
One is that Trump’s tariffs will push prices higher and cause a significant bout of inflation. In the University of Michigan’s latest monthly survey, consumer expectations for future inflation jumped, most likely because of news people have heard about new Trump tariffs. “Consumers are becoming more worried about the likely stagflationary impact of President-elect Donald Trump’s policy plans,” Capital Economics explained in a Jan. 10 analysis.
Investors seem to share those concerns, which might help explain unusual moves in interest rates.
Since last September, the Federal Reserve has cut short-term rates by a full percentage point. But the rate on the 10-year Treasury bond has risen by slightly more than a full percentage point since then, a highly unusual divergence.
“Markets may be in the process of adapting to a more volatile, inflationary and indebted future,” Moody’s Analytics explained in a Jan. 13 analysis.
If there’s a resurgence of inflation, the Fed would have to end the rate-cutting cycle it began just four months ago. Many investors now think that is likely to happen. The CME Group’s FedWatch tool shows markets pricing in higher short-term rates since Trump got elected in November, and especially since early January.
Trump isn’t the only factor. A strong jobs report for December showed the economy running hot and possibly in need of no further rate cuts. But that came on top of worries about Trump stoking fresh inflation.
Higher interest rates affect stocks in a couple of ways. When fixed-income rates go higher, bonds become more attractive relative to stocks and some investors will sell stocks and buy bonds. Higher rates also depress profits since borrowing becomes more expensive for businesses, which can ratchet some stock values lower.
Trump could change the narrative once he takes office if, for instance, he hints at off-ramps for tariffs on imports from China, Mexico, Canada, and other trade partners. He could also limit deportation efforts to specific groups of migrants, such as convicted criminals, which might suggest he’s not looking to deport workers. Some investors remain positive about the investing climate under Trump, expecting that his threats will be much worse than his actions.
But it could take a while for the fog of Trump to clear, given that he may wish to use tariff and deportation threats as leverage in various types of negotiations that could take months. So he might not show his hand right away. What markets are telling Trump is that he should avoid anything inflationary.
They’re not yet saying how patient they’re willing to be.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman.
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