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(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 not necessarily a 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 finishing the week nearly 2% 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, up about 1%. Small-cap stocks, close to a pure-play bet on the president-elect’s pro-growth, protectionist policies, are down 3%. 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.