Post-election shockwaves: How markets are grappling with economic shifts
The honeymoon between the incoming Trump administration and U.S. equity markets has proven to be short lived. This past week, equity markets experienced a sharp decline, erasing a significant portion of the gains seen since Election Day. Following a rally on and after November 8 – driven by optimism over potential pro-growth policies and tax cuts – the markets hit a wall. Rising bond yields and sticky inflation rates served as reminders that economic challenges remain.
Chief Investment Officer Thierry Hasse
Inflation data sparks market pullback
The market downturn began in earnest with the release of October’s Consumer Price Index on Wednesday. While monthly increases were in line with expectations, annual inflation rates climbed to 2.6% for the all-items CPI and 3.3% for core CPI, which excludes volatile food and energy components.
Though inflation moderated in several areas, persistently high housing costs cast a shadow. Although the Federal Reserve’s goal of 2% inflation is still within reach, fixed-income markets are signaling that the final phase of reducing inflation could take longer than expected.
Rising bond yields reflect growing investor concerns
Bond investors have begun pricing in heightened risks, including persistent inflation, higher budget deficits and the potential for rising trade tensions. In response, the 10-year Treasury Note yield reached 4.5% on Friday — a significant increase of 85 basis points since mid-September.
This sharp rise in long-term yields is especially notable given that it follows two months of Federal Reserve interest rate cuts. The divergence between the Fed’s actions and market behavior raises the question: Is the bond market signaling a potential policy misstep by the U.S. central bank?
Equity markets feel the pressure
Equity markets struggled under the weight of higher inflation, uncertainty around Federal Reserve policy and fading optimism regarding the incoming administration’s pro-business agenda. The S&P 500 Index ended the week with its worst performance in over two months, closing below the 6,000 level.
Adding to these challenges, equity valuations remain elevated by historical standards. The S&P 500’s current price-to-earnings (P/E) ratio sits at 24.4, with a forward P/E of 21.8. With the index priced for perfection, there is little room for disappointment.
Looking ahead
As the third-quarter earnings season wraps up and the policy implications of the U.S. election come into sharper focus, markets will likely return to debating the trajectory of inflation, Federal Reserve policy and interest rates.
The coming weeks will reveal whether equity markets can regain their footing or if last week’s sell-off marks the beginning of a more significant correction. At Elevage Partners, we’ll continue to monitor these developments closely and provide insights as the situation evolves.
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