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Even before the Presidential election of 2024 was held, the investors were already staking out positions that anticipated a strong economy once Trump assumed office. All this positive thinking prevailed, even in the face of the threat of unprecedented tariffs, especially on imports from the US largest two trading partners, Mexico and Canada. Equity investors, initially, ignored the negative implications of tariff threats of 25%. The stock market just powered ahead with the S&P hitting record highs and the tech companies pushing ever upwards.

US Equity Indices

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That optimism has now given way to a broad-based sell off in the equity markets, in just 3 trading sessions, the equity markets have retreated, to the extent that:

• The tech-led sector sold off, resulting in the Nasdaq losing 5.5%; 
• The S&P and Dow industrials dropped by 3% and 1.5%, respectively; 
• The benchmark 10-yr Treasury bond has dropped from its recent high of 4.8% to 4.3%, the lowest since last December; 
• Bitcoin, the darling of so many Trump supporters, fell below $90k, having reached $105k just four weeks ago;
• Basic economic performance measures, such as retail sales and consumer confidence, actually declined last month, and retailers are guiding lower on sales and earnings; 

Enter inflation expectations. Investors consider the impact of global tariffs on inflationary expectations. A popular measure of inflation expectation is the so-called 2-year breakeven measure. That is, the difference between yields, adjusted for inflation, and nominal yields. That spread just reached its highest since 2023, signalling that investors expect inflation to continue at 3%, as it did in January. 

Enter monetary policy The Fed has made it clear it is no rush to cut rates, even though its trading partners, such as Canada and the EU, are moving in that direction.So, the Fed finds itself between a rock (rising inflation expectations) and a hard place (sluggish growth). Making matters worse is Trump’s frequent demands that the Fed reduce its lending rate to stimulate growth. Investors fear political interference with the Fed could adversely affect confidence in an unfettered trading environment.
 

Enter the currency markets.When Trump took office, the USD index took off and rose substantially against a basket of other currencies, composed of its major trading partners. The USD rose in response to the expected inflationary impact of tariffs, preventing the Fed from dropping rates. Now, that trade is reversing itself, as the USD already has fallen by 2% in recent sessions.

Enter political uncertainty. Investors have repeatedly voiced concern over the high degree of political uncertainty. Trump has a stop-start approach to setting tariff policy. Confusion reigns regarding the removal of illegal immigrants and its impact of the domestic supply chain. And, Musk’s slash and burn approach to public sector employment and programs just adds to the chaos at the Federal level. Wrapping these uncertainties together, it is no wonder that the markets are deeply concerned over the prospects for continued prosperity. 

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