From Postelection Rally to Preelection Levels: A Market Reversal

The postelection rally that swept through markets following Donald Trump's victory in the 2024 presidential election was short-lived. After peaking on Monday, November 13th, with the S&P 500 closing above 6,000 and the Dow above 44,000, the rally reversed by Friday, with the S&P losing 2.1% and the Dow falling 1.2% for the week. This reversal can be attributed to a combination of factors, including economic indicators, geopolitical dynamics, and market sentiment.

Economic indicators played a significant role in the market's reversal. Inflation concerns resurfaced as the U.S. consumer price index climbed to 2.6% in October, its first rise in six months. Additionally, the Federal Reserve's cautious approach to interest rates, with Chair Jerome Powell noting that the central bank doesn't need to rush rate cuts due to the economy's strength, dampened market enthusiasm. Volatile oil prices, which surged post-election due to OPEC+ production cuts, also contributed to market volatility.



Geopolitical dynamics, particularly the China-U.S. relations, also influenced the market's trajectory. Post-election, markets initially rallied on hopes for a more business-friendly administration, with small-caps and energy stocks surging. However, concerns over potential trade wars and retaliatory tariffs from China dampened enthusiasm. This was evident in the market's retreat on Wednesday, with the S&P 500 and Nasdaq snapping their five-day winning streaks. Additionally, former Fed President Loretta Mester warned that Trump's proposed tariffs could slow rate cuts, further impacting markets.

Market sentiment shifted from postelection enthusiasm to concerns about inflation and interest rates as the week progressed. The initial postelection rally was fueled by optimism surrounding Donald Trump's market-friendly policies and his purportedly inflationary economic plans. However, as the week progressed, investors began to focus on other economic indicators and the potential impact of Trump's policies on inflation and interest rates. The U.S. Federal Reserve's slightly hawkish tone, as indicated by Jerome Powell's comments, dampened market enthusiasm and lowered traders' expectations for a December rate cut.

The change in investors' expectations for interest rate cuts impacted the performance of various market sectors and asset classes. Small-cap stocks, initially seen as beneficiaries of Trump's policies, retreated. Meanwhile, defensive sectors like utilities and consumer staples, which typically perform well in a low-rate environment, held up better. Bonds, sensitive to interest rate changes, saw yields rise, affecting their prices. Bitcoin, which had surged during the postelection rally, also retreated from its highs.

In conclusion, the postelection rally was short-lived, with markets reversing course by the end of the week. This reversal was driven by a combination of economic indicators, geopolitical dynamics, and market sentiment. As investors refocused on economic fundamentals, the Fed's hawkish tone, signaling a slower pace of rate cuts, dampened market enthusiasm. This shift in expectations impacted various sectors and asset classes, highlighting the importance of a balanced and analytical approach to investing in volatile markets.