Tensions in the Markets: The Time of Euphoria Seems Over

The mood in the financial markets has recently become noticeably clouded after the S&P 500 Index unexpectedly fell below its level from November 5, the day before Donald Trump's election as President. Investors' fear of persistent inflation dampens hopes for imminent interest rate cuts. Stronger than expected labor market data on Friday further exacerbates this uncertainty. The S&P 500, which was trading at 5,793 points with a decrease of 0.6% at 11:08 AM on Monday, shows a reduction of about 5% since its peak in December. Stagnant economic prospects, concerns about inflated stock valuations, and the uncertain interest rate policy of the Federal Reserve significantly dampen investor sentiment. Added to this are uncertainties regarding the implementation of Trump's policies, such as the introduction of comprehensive tariffs on imported goods and the planned repatriation of low-paid, undocumented workers. These plans could hamper economic growth, which burdens not only the stock markets but also the bond markets. Yields on 20-year government bonds have surpassed the 5% mark, and those for 30-year bonds also briefly reached this milestone. Another concern is the growing volatility in the markets, with the VIX index exceeding the 20-point mark, indicating increasing nervousness among traders. Michael O’Rourke from JonesTrading describes the current situation as a clash of high expectations with reality and classifies the political process as difficult. The situation differs markedly from Trump's earlier term in 2017 when these issues were less pronounced. The stock valuation at the start of his first term was not as inflated as it now appears, and interest rates were significantly lower at that time, which, in their view, favored market development. The likely end of the euphoria surrounding Trump's economic policy initiatives is at the forefront, as internal party differences and the possibility of a government shutdown raise doubts about their feasibility. Pro-growth initiatives could fail due to political hurdles, further dampening market expectations. However, there are points of hope for investors, especially regarding Trump's interest in the stock market, which he regards as a measure of his success. The expectation is that Trump might make adjustments in the event of negative market developments. Strategists hope that tariffs will primarily be used as a bargaining tool rather than a hard measure to avoid burdens.