The Nasdaq composite index has fallen more than 10 percent from its December peak. The S&P 500 now sits below its level on Election Day.
By Aaron Gregg
The stock market rally that followed Donald Trump’s election win has reversed itself over the past several weeks as a trade war sparks volatility on Wall Street, with the Nasdaq composite index leading major benchmarks lower on Thursday.
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Trump’s election victory had many investors looking forward to lower taxes and regulation. But analysts who spoke to The Washington Post said sentiment about the first month and a half of his administration has been dominated by uncertainty over aggressive tariffs, major shifts in foreign policy and an Elon Musk-led effort to downsize the federal government.
After another abrupt change on trade policy by the Trump administration — which said it would pause tariffs on some goods from Mexico and Canada until April 2 — the tech-heavy Nasdaq index fell 2.6 percent Thursday, leaving it down more than 10 percent from its record set in December, putting the index in correction territory. The broader S&P 500, which had gained about 5 percent during the first three months after Trump’s election**,** has fallen sharply in recent weeks, including a 1.8 percent decline Thursday. The S&P 500 is below where it closed on Election Day, Nov. 5.
Anticipation of the second Trump administration did more to buoy markets from November through most of January than Trump’s policy moves as president since then, CFRA investment analyst Sam Stovall said.
“Once we started getting into the actual administration we find that the returns aren’t as good, and ‘wanting seems to be more rewarding than having,’” Stovall said, paraphrasing a quote from “Star Trek.”
Stock market reactions won’t determine the Trump administration’s trade policy, Commerce Secretary Howard Lutnick said Thursday during a TV interview. Imposing fiscal discipline on the government will drive stocks higher, he said.
“When we balance the budget, you’re going to see interest rates drop by 1 percent or more and the stock market is going to explode,” Lutnick told CNBC.
Historically, the stock market has tended to perform well in the four months following a U.S. presidential election, according to a CFRA analysis.
Presidents have often pointed to positive investment returns as evidence that their economic plans are working, though stocks are influenced by a vast range of mostly nonpolitical factors including interest rates, corporate earnings and commodity prices.
The stock market’s post-election ups and downs have tended to be more heavily influenced by what was happening in the financial world at the time, Stovall said, including policies put in place by previous administrations.
The S&P 500 declined dramatically in the immediate aftermath of the 2000 victory of George W. Bush, when the country was gripped by uncertainty for weeks over the electoral outcome, and the 2008 win of Barack Obama amid the Great Recession.
The four-month period after Trump’s first election victory in 2016 saw the S&P 500 rise 10.4 percent, according to CFRA. It gained 13.4 percent during the comparable period after Joe Biden’s 2020 win during the coronavirus pandemic.
Investor sentiment during the second Trump administration has been dominated by uncertainty over trade policy. Lingering inflation and the threat of tariffs “has caused investors to second-guess the early benefit of the new Trump administration,” Stovall said.
While Trump had long telegraphed that he would impose tariffs as president, the rollout of those new import duties has been marked by sudden postponements or delays in implementation. “Investor sentiment … is volatile right now because we’re all trying to figure out what [Trump’s] trade policy is going to look like,” said Tom Hainlin, senior investment strategist at U.S. Bank.
Investors are closely watching for cracks in the economy, and some new data points are giving them cause for concern, experts said. A widely followed metric of consumer sentiment from the University of Michigan dropped to a seven-month low in February as households’ expectations for inflation also increased.
Economists widely expect tariffs to raise inflation, and consumer prices were edging up 3 percent in January from a year earlier.
Investors are closely watching Friday’s job market report for signs of any weakening in the labor market. A report from the payment-servicing company ADP estimated only 77,000 private-sector jobs were created in February, marking the slowest gains since July. Initial unemployment claims for last week, a proxy for layoffs, came in slightly lower than the week before.
“For now, tariff-induced inflation amid slower growth could bring the economy dangerously close to stagflation,” said LPL Financial chief economist Jeffrey Roach, referring to a long-feared combination of inflation and tepid economic growth.