The markets are sending a message to Trump.
The S&P (^GSPC) stock index rose 5.3 percent in the first month after Election Day in November. Investors are looking to President-elect Donald Trump’s promise of fiscal stimulus in the form of tax cuts and trade-friendly deregulation and other measures that could boost corporate profits.
Since Dec. 6, however, the S&P 500 has fallen 4% as investors worry about Trump’s “America First.” Trump’s proposed tariffs on imports will raise prices, and Trump’s plans to deport immigrants could raise labor costs. Just as the first wave that peaked in 2022 appears to be subsiding, this is creating a new wave of second inflation.
Markets will welcome Trump’s inauguration on Jan. 20 as it ends 10 weeks of speculation about Trump’s policies and begins to make clear what he intends to do. But markets have sent some critical signals that Trump would be wise to comply.
“Trump’s policies involve complex favorable and adverse supply shocks and demand shocks,” Citi Economists recently noted in their 2025 outlook. Bottom line, the uncertainty surrounding Trump’s policies is significant.
Markets abhor uncertainty, and are suddenly engulfed in it.
An Economic instability index According to economists Scott Baker, Nicholas Bloom and Steven Davis, it jumped from 109 in October to 225 in November — the highest level since 2022. It dropped to 215 in December, still well above average levels.
So far, “2025 has been chaotic,” investment firm Fundstrat Tom Lee said in a Jan. 12 video analysis. There is policy uncertainty coming from the incoming White House. These are the obvious ones: tariffs and deportations.
The Federal Reserve is also on edge. All participants assessed uncertainty about the scope, timing, and economic impact of changes in policies affecting foreign trade and immigration.
If investors and policymakers are confused, it’s probably because Trump and his team are sending mixed signals. Some Trump advisers are fueling media reports that Trump is adjusting his tariff plans. Trump himself denied it in a post on social media. Wall Street is splitting into two camps: one that expects less disruption to business and one that expects more.
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Markets represent certain risks.
One is that Trump’s tariffs will raise prices and lead to higher inflation. In a recent monthly survey by the University of Michigan, consumers’ expectations for future inflation rose, likely due to news of new Trump tariffs. “Consumers are increasingly concerned about the potential impact of President-elect Donald Trump’s policy plans,” Capital Economics said in a Jan. 10 analysis.