Jamie Spencer
Investors are set to closely monitor inflation data in the coming week, as they assess whether current trends can sustain the stock market’s record-breaking rally following Donald Trump’s victory in the U.S. presidential election. The benchmark S&P 500 surged to an all-time high on Friday, breaching the 6,000 mark for the first time, driven by expectations of tax cuts and deregulation under Trump’s administration, which has spurred a renewed appetite for equities.
Fed’s Rate Cut and Economic Outlook
Boosting market sentiment was the Federal Reserve’s recent move to cut interest rates by 25 basis points, a widely anticipated action that underscored a positive economic outlook. However, the central bank’s capacity to continue easing rates will hinge on upcoming data, particularly the consumer price index (CPI) report on November 13. “The CPI needs to confirm that inflation continues to head in the right direction,” said Art Hogan, chief market strategist at B Riley Wealth.
Economists polled by Reuters expect October’s annual CPI to show a 2.6% increase, a slight rise from September’s 2.4% pace, which was the smallest gain since 2021. This figure, though modest, is significantly lower than the four-decade highs seen in 2022 that previously prompted the Fed to aggressively raise interest rates.
Inflation and Trump’s Economic Policies
Investors are wary of how Trump’s proposed policies, particularly higher tariffs, could contribute to rising consumer prices. While current U.S. economic data remains robust—evidenced by a 2.8% growth rate in the third quarter—there is concern that inflationary pressures could resurface. “We ultimately think that they do take that shallow path because inflation is still a risk,” said Michael Reynolds, vice president of investment strategy at Glenmede. He added, “We just got through a period of well-above average inflation. Historically, that’s come in waves.”
The Fed funds futures indicate that investors now anticipate rates will decrease to about 3.7% by the end of 2025, compared to the current range of 4.5%-4.75%, representing a notable shift from September’s expectations.
Stock Market Shifts and Trump Trades
Trump’s election victory has already led to significant stock market movements, dubbed “Trump trades,” which investors continue to digest. The small-cap Russell 2000 jumped 8% over the past week as smaller, domestically-focused companies are projected to benefit from Trump’s proposed tariffs on imports. Similarly, the S&P 500 banks index saw a 7% increase, reflecting optimism that the Republican administration will push for regulatory rollbacks that favor lenders.
Jim Baird, chief investment officer at Plante Moran Financial Advisors, cautioned that uncertainties remain. “We’re a long way from knowing specifics around either tax policy or trade policy, but those are both on the table and will undoubtedly weigh into the Fed’s calculus as they look ahead from here,” he said.
The Path Ahead: Inflation and Policy Uncertainty
As Trump’s economic agenda begins to take shape, including the possibility of growth-stimulating policies that could elevate inflation, investors are bracing for potential market volatility. “Markets have started to digest Trump’s victory,” noted analysts at UBS Global Wealth Management. “As more detailed policy proposals emerge from the Trump transition team, investors should brace for further swings ahead.”
The market’s ability to maintain its momentum will be influenced by how inflation trends develop and how the Federal Reserve responds in its rate policy. The initial excitement following Trump’s victory may face challenges as the administration’s fiscal and trade strategies unfold and their potential impact on inflation becomes clearer.
Investors are entering a pivotal period as they await crucial inflation data and anticipate more clarity on Trump’s policy goals. While the recent stock market rally has shown resilience, underpinned by strong corporate earnings and positive economic indicators, inflation concerns remain at the forefront. The balancing act between economic growth and inflationary risks will shape the trajectory of the markets in the coming months.
