When Donald Trump won the presidency in November, Wall Street seemed thrilled. Stocks hit record highs as investors hoped for a pro-business agenda and a booming economy. But just a few months later, the excitement is cooling off. Why? Because some of Trump’s proposed policies—like universal tariffs, tax cuts, and mass deportations—might lead to something investors fear: inflation.
Let’s break this down and look at what’s happening and why it matters to your wallet, investments, and the broader economy.
What’s Got Investors Worried?
Here’s the deal: inflation eats away at the value of money and can hit stocks and bonds hard. Trump’s plans for big spending and tax cuts could drive up the deficit, while tariffs might raise prices on everyday goods.
The bond market is already flashing warning signs. The 10-year US Treasury yield—basically the interest rate the government pays to borrow money—hit 4.70% this week. That’s the highest it’s been since April and a jump of 50 basis points since Trump’s election win. Why does that matter? Rising yields often mean higher borrowing costs for businesses and consumers, which can slow the economy.
Inflation and Its Double-Edged Swor
Typically, rising bond yields can signal a strong economy. But this time, the story is different. The bond market is hinting at trouble: sticky inflation could force the Federal Reserve to keep interest rates high.
Ed Yardeni, a respected market analyst, explained it like this: “Inflation, especially in services, is stubbornly above 2%, and long-term yields will keep climbing until the Fed acknowledges the economy’s strength and pauses rate hikes.”
Translation? Even if the economy looks good, persistent inflation could make life tougher for investors and consumers alike.
Déjà Vu of Inflationary Times?
If inflation rises sharply, it could drag the stock market down, just like it did in the 1970s and early 1980s. Bank of America recently warned that higher rates might hurt stocks more than they help. In short, even a strong economy might not save us if inflation takes over.
Big Spending, Big Risks
Trump’s call for Congress to pass “one big, beautiful spending bill” has investors nervous. Why? Because a massive spending package could push the deficit sky-high, leading to more Treasury auctions (i.e., the government borrowing even more money). That could send interest rates soaring, making markets even more unpredictable.
Torsten Slok, an economist at Apollo, summed it up perfectly: “Every time there’s a Treasury auction, the conversation is about how unsustainable fiscal policies are becoming.”
What Could Stop the Slide?
James Van Geelen, founder of Citrini Research, believes the market itself might have to push back against Trump’s proposals. He suggests that every time deficit-cutting or inflation-driving policies are discussed, the market will likely “throw a fit” by dropping sharply. It’s like the market saying, “Hey, this isn’t working for us!”
What Does This Mean for You?
If you’re an investor or just keeping an eye on your savings, now’s the time to watch the bond market closely. Rising yields could mean higher borrowing costs for mortgages and loans, while inflation might make everyday goods more expensive. Diversifying your investments and staying informed is key during uncertain times.