During the first month after Election Day in November, the S&P (^GSPC) stock index rose a nifty 5.3%. Investors cheered incoming President Donald Trump, who promised fiscal stimulus in the form of tax cuts, plus business-friendly deregulation and other measures likely to juice corporate profits.
Since Dec. 6, however, the S&P 500 has dropped by 4% as investors worry about Trump’s “America first” agenda. The tariffs Trump wants to impose on imports would push prices up, and Trump’s plan to deport migrant workers could push labor costs higher. That’s causing new jitters about a second wave of inflation just as the first wave, which peaked in 2022, seemed to be fading.
Markets may welcome Trump’s inauguration on Jan. 20, since it will end 10 weeks of speculation on Trump’s policies and start to bring clarity about what he actually plans to do. But markets have sent some crucial signals Trump would be wise to heed.
“Trump’s policies entail a complicated mix of favorable and adverse supply shocks and demand shocks,” Citi economists recently wrote in their outlook for 2025. “Bottom line, the uncertainties surrounding Trump’s policies are significant.”
Markets hate uncertainty, of course, and they’re suddenly awash in it.
An economic uncertainty index maintained by economists Scott Baker, Nicholas Bloom, and Steven Davis jumped from 109 in October to 225 in November — the highest level since 2022. In December, it fell to 215, still far above average levels.
So far, “2025 has been turbulent,” Tom Lee of investing firm Fundstrat said in a Jan. 12 video analysis. “There is policy uncertainty coming from the incoming White House. These are the obvious things: tariffs and deportations.”
The Federal Reserve is on edge too. “All participants judged that uncertainty about the scope, timing, and economic effects of potential changes in policies affecting foreign trade and immigration was elevated,” the minutes of the Fed’s December meeting revealed.
If investors and policymakers are confused, it might be because Trump and his team are sending mixed signals. Some Trump advisers are fueling media reports that Trump is paring back his tariff plans. Trump himself refuted that in a social media post. Wall Street is splitting into two camps: one that expects minimal disruption to trade and one that expects a lot more.
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Markets are indicating a couple of specific concerns.
One is that Trump’s tariffs will push prices higher and cause a significant bout of inflation. In the University of Michigan’s latest monthly survey, consumer expectations for future inflation jumped, most likely because of news people have heard about new Trump tariffs. “Consumers are becoming more worried about the likely stagflationary impact of President-elect Donald Trump’s policy plans,” Capital Economics explained in a Jan. 10 analysis.
