Wall Street initially celebrated Donald Trump’s election victory in November, pushing the stock market to unprecedented highs driven by optimism about a pro-business agenda and robust economic growth.
However, only a few months later, investors are grappling with the reality that some of Trump’s proposed policies—such as universal tariffs, significant tax cuts, and mass deportations—could lead to rising inflation and a challenging market environment reminiscent of 2022. That year, both stock and bond prices plummeted simultaneously, marking a historic downturn.
Bond yields have surged in recent weeks, with the 10-year U.S. Treasury yield approaching the critical 5% level. This development underscores concerns that inflation could rebound sharply. The 10-year yield hit 4.70% on Wednesday, the highest since late April, climbing 50 basis points since Trump’s November 6 victory. The bond market’s clear message is that Trump’s policies, rather than exclusively spurring growth, could exacerbate inflation and complicate market dynamics.
Typically, rising bond yields align with a strong economy. However, this recent increase appears more tied to inflation risks and the possibility that the Federal Reserve may need to maintain elevated interest rates to counteract expansive fiscal policies. Ed Yardeni, a market analyst, captured this sentiment in a recent note, emphasizing that long-term yields might continue to rise until the Fed acknowledges the economy's resilience and adjusts its stance accordingly.
Yardeni pointed to persistent inflation in core services of the Consumer Price Index (CPI) and Personal Consumption Expenditures Deflator (PCED), which remain well above the Fed’s 2% target. “The Bond Vigilantes aren’t buying the Fed’s esoteric narrative that the federal funds rate needs to be cut,” Yardeni remarked. This skepticism reinforces the growing concern that surging yields could undermine equity markets, even in the face of a thriving economy.
Bank of America recently echoed these concerns, warning that rising rates could become a more significant obstacle to equities than the benefits of strong economic growth. The parallels to past inflationary periods, such as the 1970s and early 1980s, are unnerving investors who fear history could repeat itself. High inflation during those decades led to prolonged market struggles and volatility.
Adding to investor apprehension is President-elect Trump’s push for Congress to pass a massive, singular spending bill rather than breaking it into smaller legislative packages. This approach could lead to a dramatic increase in deficit spending, triggering alarm in financial markets. Larger Treasury auctions may follow, potentially driving interest rates and bond yields even higher. Economist Torsten Slok of Apollo highlighted this in comments to Bloomberg, noting that Treasury auctions already spark daily discussions about fiscal sustainability, an issue Federal Reserve Chair Jay Powell has repeatedly deemed unsustainable.
Even if the Trump administration manages to reduce the federal spending deficit despite policies widely viewed as inflationary, it may still pose challenges for the economy and stock market. James Van Geelen, founder of Citrini Research, recently outlined the delicate balancing act facing markets. Investors, he suggested, must signal their discontent with deficit-cutting measures they perceive as detrimental by driving the Dow lower whenever such policies are discussed. “Essentially, once the market realizes that Trump could be serious about cutting the deficit... it will become the market’s responsibility to throw a fit when it is discussed,” Van Geelen explained.
The combination of Trump’s ambitious policy agenda and the bond market’s response presents a precarious situation for wealth advisors and RIAs. Navigating these challenges requires close attention to macroeconomic trends and a proactive approach to portfolio management. Rising bond yields, persistent inflation risks, and potential fiscal policy shifts create an environment of heightened uncertainty. Advisors must evaluate how these factors could influence client portfolios, particularly in terms of balancing risk and return.
For instance, the bond market’s trajectory suggests that fixed-income instruments may continue to face downward pressure. Rising yields erode bond prices, making this asset class less attractive in the short term. However, higher yields could also provide an opportunity for reinvestment at more favorable rates, especially for clients seeking income generation. Advisors must carefully weigh the timing and structure of fixed-income allocations to optimize returns while mitigating risks.
Equities, meanwhile, face their own set of headwinds. If rate pressures intensify, they could overshadow the tailwinds of economic growth. Sector-specific strategies may help navigate this environment. For example, inflation-resistant sectors like energy, utilities, and consumer staples could provide stability. At the same time, sectors sensitive to interest rates, such as technology and real estate, may require more cautious positioning.
Trump’s trade policies, including potential tariffs, also warrant close monitoring. Protectionist measures could disrupt supply chains and increase costs for businesses, potentially dampening corporate earnings and stock performance. Diversifying portfolios to include international equities or companies with limited exposure to U.S. tariffs may help mitigate these risks.
Advisors should also consider the implications of fiscal policy on tax strategies. Lower tax rates, if enacted, could boost disposable income and corporate profits in the short term. However, the long-term impact of ballooning deficits on the broader economy could offset these gains. Strategizing around tax-advantaged accounts and estate planning could provide clients with more flexibility in managing potential tax changes.
Communication with clients will be paramount during this period of heightened market volatility. Transparent discussions about the risks and opportunities presented by the current macroeconomic landscape can help build trust and confidence. Advisors should emphasize the importance of staying disciplined and adhering to long-term financial goals, even as short-term uncertainties unfold.
Ultimately, the evolving market environment under a Trump administration underscores the importance of adaptability and vigilance for wealth advisors and RIAs. By staying informed, proactively adjusting strategies, and maintaining open lines of communication with clients, advisors can navigate the complexities of this challenging period while safeguarding and growing their clients’ wealth.
