(Bloomberg) — It wasn’t supposed to be this way. With the economy booming, a friendly Federal Reserve at its back and Donald Trump headed to the White House, Wall Street saw nothing but upside as the calendar turned.
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Ten days into 2025 and hopes for an easy ride up across markets are in trouble. A choppy start to the year turned into an all-out selloff Friday, when evidence of rising strength in the US labor market was interpreted bearishly by traders who saw it closing the door on fresh monetary easing anytime soon.
Friday’s action was the clearest sign yet that good economic news is no blessing for markets pure and simple, threatening in particular interest-rate sensitive strategies and indebted firms across Corporate America. A report showing payrolls surged and the unemployment rate shrank created headaches for anyone pinning bullish hopes for 2025 on more stimulus from Jerome Powell’s central bank.
“The last few weeks might be a good preview of what the entire year will be like,” said Priya Misra, portfolio manager at JP Morgan Asset Management. “Not easy but volatile and messy – we have a combination of the Fed on hold, rich valuations (all assets pricing in optimism and a soft landing) and two-sided policy uncertainty.”
Stocks plunged, with the S&P 500 on track to finish the week 1.5% lower — the biggest weekly drop since Fed Chair Powell shook markets last month by signaling the inflation specter had yet to be vanquished. Treasury yields extended their almost uninterrupted upward march from that date, with 30-year rates briefly exceeding 5%. Bitcoin rose, but only after losing 9% in the previous three sessions.
A growing casualty of the turbulence has been the risk-asset incarnation of what has been labeled the Trump trade — its bullish half, which foresaw tax cuts and deregulation pushing equities higher even after blowout gains in the last two years. Instead, investors are coping with the leg of the trade they didn’t want: spiraling bond yields pushed up by concern that unchecked spending and tariffs on trade will foster inflation.
While Bitcoin remains sharply higher since election day, gains in the S&P 500 have narrowed considerably. Small-cap stocks — close to a pure-play bet on the president-elect’s pro-growth, protectionist policies — have fallen further. Surging bond yields also threaten to raise the cost of financing Trump’s policy agenda, with 10-year rates now almost 20 basis points higher than at the end of the year.
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“There is just too much optimism based on consensus thinking that the Fed’s going to keep cutting interest rates,” Max Wasserman, senior portfolio manager at Miramar Capital, said in a phone interview. “People are over reliant on a Fed put.”
Unlike last year, when evidence of a low-inflation expansion in the US sent stocks up and kept Treasuries in check, January has seen a revival in lockstep, downward moves between the asset classes, befitting inflation’s revived emphasis. The 40-day correlation between the two markets turned positive in December after loosening for most of the fourth quarter, underscoring growing anxiety that stubborn price pressure will temper the Fed’s bid to ease policy.
The combined return of stocks and bonds has now been negative for five consecutive weeks, the longest stretch since September 2023, as measured by the world’s largest ETFs tracking the S&P 500 and long-dated Treasuries.
Count money boss Bill Harnisch among the few who saw it coming. His $1.9 billion Peconic Partners hedge fund, which has spent most of the last four years walloping the market with a 192% return, has been taking down leverage, shorting housing-related stocks and reining in exposure to technology megacaps out of concern that both a weak and strong economy created hazards for bulls.
“You’re in a lose-lose situation,” Harnisch said by phone, citing the risk that accelerating growth snaps the Fed back into action. “We think it’s a very risky market.”
Friday’s employment report is the latest in a string to show the US economy firming and the potential for price pressures increasing. A University of Michigan survey showed consumers’ longer-term inflation expectations rising to the highest level since 2008.
Market expectations for inflation over the next two years, as measured by two-year breakevens, sit at 2.7%, the highest level since April. Commodity prices are set for a 4% jump this week, with Brent crude oil hitting $80 dollar a barrel for the first time since October on US sanctions news.
“The more growth surprises to the upside, the more investors have to worry about what that will mean for inflation,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. “The closer we get to no cuts on the way to possible hikes, and the closer 10-year yields get to new cycle highs, the more investors start to worry about what that could mean for liquidity, growth and credit issues.”
–With assistance from Emily Graffeo.
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