President-elect Donald Trump’s favorite barometer of his success — the stock market — had been humming since his reelection. Business-friendly promises of deregulation and tax cuts got investors excited with anticipation of unlocked profit and easy money. And then reality set in this week.
But Federal Reserve Chair Jerome Powell in a press conference Wednesday reminded markets who’s boss: The Fed said inflation will remain higher than expected next year, and that it is now pricing in just two rate cuts in 2025, rather than the four it had expected during its previous projection in September.
Stocks plunged on the news, with the broad-based S&P 500 tumbling 3%. The Dow lost more than 1,100 points, falling for the 10th straight session — the longest such losing streak since 1974.
The market’s strong reaction shows that the Fed, ultimately, could weigh more heavily on markets than Trump’s policymaking going forward.
The Fed’s projections on rates and inflation were like a “punch in the face to the market,” said Art Hogan, managing director and chief market strategist at B. Riley Investments.
“That got everyone spooked,” he added.
And just like that, the post-election stock market rally has been almost entirely erased. The Dow, which had risen nearly 2,800 points since Election Day before its epic slide started, ended Wednesday with a total gain of just 100 points since Trump was reelected.
Nothing comes easy
Although the Fed on Wednesday delivered the much-anticipated quarter-point cut investors were banking on, traders were left shellshocked by central bankers’ 2025 forecast. For markets, fewer rate cuts could mean lower-than-expected earnings, less hiring and a weaker-than-expected economy.
But wait — wasn’t Trump’s win supposed to be the Holy Grail igniting Wall Street for the next four years with tax cuts and deregulation galore? Not so fast.
“Powell just reminded us that nothing in life comes easy,” Callie Cox, chief market strategist at Ritholtz Wealth Management, told CNN, referring to recent gains the stock market has seen.
“It was always hard to completely trust the rally that we saw in markets post-Election Day,” she said. “A lot of it seemed like investors threw a lot of context away, and they just took what they wanted from policy speculation.”
But lately, some of the euphoria around what Trump could deliver for investors “is wearing off a bit,” she added.
Now, some of the focus is shifting to the reality of how his policy proposals, including widespread tariffs, could negatively impact the economy and how the Fed will have to respond as a result.
The new inflation forecasts show that “this last mile is going to take longer,” Hogan said.
What happens next?
To be fair to investors, one part of the market predicted this very scenario — even before the Fed: the bond market. Treasury yields had been rising as bond prices fell in the weeks leading up to Trump’s reelection. And yields have been higher ever since.
That’s because Trump’s tariff and mass deportation policies could drive inflation higher, bringing the Fed’s rate-cutting campaign to a screeching halt. Yields also rose as Trump promised more tax cuts and deficit spending, which could flood the market with new Treasury bonds to help the incoming Trump administration borrow the money it needs to fund its initiatives.
Of course, stock investors knew all this. They were just holding out hope that the stock rally would keep going as long as they could.
“Instead of delaying selling until early in 2025, investors decided it might be best to start taking some profits now,” said Sam Stovall, chief investment strategist at CFRA Research. “FOMO (the fear of missing out) usually ends up being a portfolio’s worst enemy.”
Stocks were set to bounce back somewhat Thursday. The epic losing streak may be coming to an end. But investor sentiment appears to have just come back down to earth. Going forward, they’ll probably be paying closer attention to the Fed than Trump.
“The Fed wields power to move markets unlike any other institution in America,” said Rob Haworth, senior investment strategist at US Bank Wealth Management.
It’s as if Powell on Wednesday was saying to Trump: I am in charge.
