Trump's Return: From Market Euphoria to Recession Fears

US stocks have experienced significant volatility following Donald Trump's return to the presidency. Initially, markets surged to record highs on hopes of deregulation and lower taxes. However, concerns over potential tariffs and a possible recession have since led to a sharp selloff, highlighting investor uncertainty in this new political landscape.

Trump's Return: Initial Market Euphoria

Upon Donald Trump's victory in the 2024 U.S. presidential election, U.S. stocks rallied dramatically, with the Dow Industrials, S&P 500, and Nasdaq Composite all reaching record highs. This surge was fueled by investor expectations of:

• Lower taxes
• Deregulation
• A president actively engaged with market performance

"Trump trades" saw a significant boost, with U.S. Treasury yields rising and Bitcoin hitting a record high. Financials, particularly banks, saw substantial gains, and small-cap companies also soared, anticipating benefits from eased regulations and reduced tax burdens.

Inauguration Day Performance

Historically, U.S. stock markets have shown mixed performance on presidential inauguration days. While the S&P 500 has seen an average decline of 0.27% since 1949 on such days, recent inaugurations, including Trump's first in 2017 and Biden's, resulted in market gains. Investors closely monitored the market's reaction to Trump's second inauguration to see if this trend of post-inauguration gains would continue.

Market Reversal: Recession Fears Emerge

Despite the initial optimism, market sentiment quickly shifted. Concerns about a potential recession, exacerbated by President Trump's comments regarding tariffs on China, Canada, and Mexico, led to a significant selloff. Key indicators of this downturn included:

• MSCI's global stock index falling over 2%, its largest one-day drop since August.
• The Nasdaq Composite experiencing its steepest percentage loss since September 2022.
• The S&P 500 reaching its lowest closing level since September.
• U.S. bond yields dropping as investors sought safer assets.

This market reaction indicated a "wake-up call" for Wall Street, as the perception of a "Trump put" (the idea that Trump would intervene to support the market) diminished. Investors began to question the administration's acceptance of market downturns and potential recession in pursuit of broader goals.

Winners and Losers in a Volatile Market

Trump's return has created a landscape of both winners and losers across global markets:

• Currencies: The Canadian dollar and Mexican peso were negatively impacted by tariff threats, while the euro and sterling initially rallied before facing renewed uncertainty.
• Equities: European equities, despite underperforming Wall Street previously, saw increased investor allocation. However, European automakers with U.S. trade exposure, such as Stellantis, Volkswagen, and BMW, experienced declines.
• Energy: U.S. crude futures fell due to Trump's vow to increase U.S. oil and gas production, despite the U.S. already being the world's largest producer.
• Cryptocurrencies: Bitcoin, which had surged on hopes of a regulatory-friendly environment, suffered a setback as Trump's initial policies made no direct reference to the asset class, though some staffing choices were seen as positive signs for the crypto community.

This period of heightened volatility underscores the market's sensitivity to political rhetoric and policy decisions, particularly concerning trade and economic outlook.

Sources

• Trump's return to the White House: Market winners and losers, Reuters.
• Stocks sink with bond yields as Trump fuels recession fears, Reuters.
• US stock performance on dates of presidential inaugurations, Reuters.
• Stocks surge to record highs as Trump returns to presidency, Reuters.
• Wall Street selloff deepens as Trump sparks recession concerns, Reuters.