The post-Election Day rally in stock prices is fading amid forecasts that the Federal Reserve will not lower interest rates as much as expected. Prior to the opening bell Monday, the tech-heavy Nasdaq was down as much as 1%, while the broader S&P 500 was off 0.65%, and the Dow Jones Industrial Average was poised to open 0.10% lower. President-elect Donald Trump had hoped his winning a second term would set off a new cycle of business optimism and continue the record-high stock prices seen under the Biden administration.
Yet the post-election rally has proved relatively short-lived amid fears of price growth reaccelerating, alongside concerns about the country’s long-term fiscal outlook. It all has to do with interest rates. The U.S. economy added 256,000 payrolls in December, prompting Wall Street traders to change their interest-rate outlook for 2025.
A new consensus has emerged that rates will not fall as much as previously anticipated — they may even have to go up again if inflation heats back up. When interest rates move higher, it becomes more expensive for traders to borrow money to buy stocks.
Post-election rally wanes as rates hold
Markets also bid up the cost for the U.S. to borrow money, another sign of re-emerging inflation fears. When prices in the economy rise, they reduce the value of fixed-income assets like bonds, since their yields are already set. Borrowing costs tend to move in tandem with interest rates.
Trump has sent mixed signals about how he would improve the U.S. fiscal outlook, promising a combination of tax cuts along with spending cuts that many view as politically difficult to achieve. Trump has called for the debt limit to be increased to allow the U.S. to continue borrowing money to pay for his budget plans, but a reduced investor appetite for U.S. treasuries would complicate Trump’s budget agenda. Markets have also been weighing the potential impact of Trump’s tariff proposals, with a general consensus that they would likely cause prices to rise.
This week, Wall Street traders will receive two sets of price data: the producer price index, which surveys domestic firms about the selling prices received for their output, and the broader consumer price index. Both were expected to have remained essentially unchanged from November to December, but any data showing faster-than-expected increases could put further pressure on markets.
