Thanks to the Bond Selloff, the Stock Market's 'Trump Bump' Has Nearly Been Erased. What’s Next?

The anticipated repeat of the 2016 post-election U.S. stock market surge appears to be fizzling out.

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Since Election Day on November 5, the S&P 500 index has managed to eke out a mere 0.8% gain, which is now at risk of disappearing entirely. Investors had initially labeled this modest rise as the latest "Trump bump," reminiscent of the market rally triggered by Donald Trump's unexpected victory in 2016. However, this performance is shaping up to be the weakest between Election Day and Inauguration Day since Barack Obama’s first inauguration in 2009, a period that coincided with the global financial crisis.

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This underwhelming outcome stands in stark contrast to 2016, when Trump’s surprise victory over Hillary Clinton ignited a sharp market rally. Back then, the S&P 500 climbed 6.2% in the stretch between Trump’s election and his swearing-in, driven by investor optimism over his promises of corporate tax cuts and deregulation.

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The Dow Jones Industrial Average has fared even worse this time around. After initially gaining post-election, the index has since slid into negative territory. What’s different this time? It seems the element of surprise might have played a critical role in 2016’s dramatic market movement.

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Back then, Trump’s victory was widely unexpected. Investors had largely priced in a Clinton win, so when the election results defied expectations, markets initially wobbled but quickly rebounded. Stock index futures surged as investors began betting on industries and sectors expected to benefit from Trump’s pro-business policies. This optimism fueled a surge in "animal spirits," a term used to describe investor enthusiasm and confidence.

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Fast forward to this election cycle, the narrative was different. The race between Trump and Vice President Kamala Harris was seen as too close to call. However, in the weeks leading up to the election, betting markets had begun signaling a likely Trump win, and investors preemptively positioned their portfolios accordingly.

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Many believed that an extended or even expanded version of Trump’s initial tax cuts, coupled with another wave of deregulation, would lead to a second "Trump bump." At first, this belief seemed justified. On November 6, the day after the election, the S&P 500 gapped higher, extending its pre-election gains. The rally culminated in a record close of 6,090.27 on December 6, marking a 5.3% increase from its Election Day close.

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However, another dynamic was at play: a simultaneous sell-off in the bond market. Investors offloading bonds caused a sharp rise in Treasury yields, which move inversely to bond prices. Historically, surging yields and a rising stock market don’t typically go hand in hand. The combination initially reinforced a sense of euphoria, as higher yields were seen as a signal of investor confidence and economic optimism.

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That harmony didn’t last. Treasury yields continued to climb, increasingly weighing on some of the most interest-rate-sensitive segments of the stock market. Among the hardest hit were small-cap stocks, which had initially been viewed as prime beneficiaries of Trump’s policy agenda. These stocks have since tumbled below their Election Day levels and are now in correction territory, having fallen over 10% from their peak on November 25.

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The divergence between bond yields and stock prices underlines a key challenge for the market. Rising yields, while often a sign of economic growth, can put pressure on equities, particularly those that are more vulnerable to higher borrowing costs. For small-cap stocks, which are typically more sensitive to domestic economic conditions and interest rate changes, this has been particularly damaging.

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The broader market appears caught in a tug-of-war between optimism over potential policy benefits and the realities of higher yields. While some investors remain hopeful about further tax cuts and deregulation under a renewed Trump administration, the market’s muted response suggests those expectations may already be baked into stock prices. The lack of a significant surprise factor has likely tempered enthusiasm compared to 2016, when Trump’s unexpected victory created a sharp pivot in investor sentiment.

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In summary, the market’s performance between Election Day and Inauguration Day this time around has been lackluster, particularly when compared to the sharp rally following Trump’s first election. A combination of pre-election positioning, rising Treasury yields, and diminishing surprise elements have left the market struggling to maintain momentum. As small-cap stocks slide and the broader market grapples with rate pressures, the hope for a repeat of the 2016 rally has largely faded.

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