Donald Trump famously helped measure the success of his time in office using the stock market.
But in the first year of his second term, Trump may have little control over what’s expected to be the key market driver of the next year: interest rates.
Since Trump was elected on Nov. 5, the 10-year Treasury yield (^TNX) has risen about 40 basis points as markets have priced in fewer interest rate cuts from the Federal Reserve amid fears inflation won’t fall quickly to the central bank’s 2% target.
At just shy of 4.8%, the yield is at its highest level since late April 2024 and above levels where strategists believe higher rates weigh on investor’s willingness to buy stocks. Similar increases in rates in April 2024 and the fall of 2023 coincided with some of the largest stock market declines of the current bull market.
For example, the last time the 10-year climbed near 5% in the fall of 2023, the S&P 500 (^GSPC) fell for three straight months, with the benchmark index declining as much as 10% over the period.
“The correlation of equity returns to bond yields has flipped decisively into negative territory (yields up, stocks down, and vice versa) — something we have not seen since last summer,” Morgan Stanley chief investment officer Mike Wilson wrote in a note to clients on Jan. 5.
Given this correlation of stocks falling when rates rise, Wilson argued rates are “the most important variable to watch in 2025.”
The trouble for Trump is that the president-elect can’t do much to influence rates lower.
In fact, many of his policies, at least when they’re talked about in public, have had an adverse effect. Take the market action seen on Jan. 6, for instance. When Trump denied a report from the Washington Post that his tariff plans may not be as widespread as initially thought, yields spiked higher and reversed an earlier decline.
A key fear among many market participants is that tariffs could prove inflationary at a time when inflation is already struggling to fall toward the Fed’s 2% target. And the central bank has already begun discussing how Trump’s policies could affect the question of whether or not to cut interest rates further in 2025.
Almost all Federal Reserve officials agreed in their last meeting that “upside risks to the inflation outlook had increased” due in part to the “likely effects” of expected changes in trade and immigration policies, according to minutes from the Fed’s Dec. 18 meeting.
Fidelity Investments director of global macro Jurrien Timmer told Yahoo Finance his “main fear” is the “inflation genie was never quite put back in the bottle.”
