Markets Are Off to a Rocky Start, but Not Directly Because of Trump

After two years of strong growth, the markets had a bumpy start to 2025. In fact, the first cracks started showing in December. After climbing to a post-election peak on December 6, the S&P 500 slid 4.5% as the market sought to catch its breath amid rising interest rates and growing uncertainty. Similarly, Canada’s S&P/TSX index fell 4.4% from its most recent high, which is far from terrible considering the persistent risks to the outlook.

While it was expected that the markets would slow somewhat after such a prolonged rally, higher rates are taking a significant bite out of risk appetite. The 10‑year US Treasury yield hit 4.78% following this morning’s strong job numbers, breaching the prior peak reached last April. Driving the bond selloff, concerns initially focused on the fiscal trajectory under incoming president Donald Trump’s expansionary economic policies. More recently, these concerns have grown in response to the Fed’s more hawkish tone.

In an unusual move, several Fed officials chose to incorporate Trump’s policy changes into their forecasts, even though these policies are very loosely defined at this point. And even though Fed Governor Christopher Waller tried to downplay the potential impact of tariffs on inflation during his speech on Wednesday, markets are not even convinced that there will be more than one rate cut this year.

But things could have been a lot worse. After all, the S&P 500 is still not far from the 6,000 mark despite the volatile start to the new year. In the space of 10 days, the United States has experienced two terrorist attacks, seen Los Angeles engulfed in a massively destructive wildfire and recorded its first human death from bird flu. And all the while, global political rhetoric has escalated to disturbing levels.

Even though the S&P 500 has now erased all of its post-election rally, the market remains more focused on rates and valuations than on political drama. Investors have learned to take Donald Trump’s rhetoric with a grain of salt, since many of his grandiose proposals have failed to materialize. For instance, there was his plan to build 10 “freedom cities” and his promise to build a border wall and get Mexico to pay for it. Even the aggressive trade rhetoric from Trump’s first term resulted in few major changes other than the hard line on China, which Joe Biden maintained.

So while some Fed members have incorporated Trump’s policies into their forecasts, the markets are taking a “we’ll believe it when we see it” approach on some of his most disruptive ambitions. Canadian decision-makers should perhaps do the same instead of taking the bait.

Speaking of Canada, in our view the big news since the start of the year wasn’t so much Justin Trudeau’s resignation—as it was largely anticipated—but rather Pierre Poilievre’s sit-down interview outlining his vision. While it was his most transparent attempt to date to lay out his plans, it was short on details.

Mr. Poilievre emphasized his commitment to cutting bureaucracy, but this is something we’ve heard many times before, and past efforts in Canada and the United States have yielded mixed results. He also touched on his vision to transform Canada into an entrepreneurship and investment hub, though he didn’t explain exactly how this would be achieved. Pitches like these are appealing, but they’ve been overused in the past decade by governments at all levels, including those in Conservative-led provinces. Given the lack of clear-cut results, more needs to be known on what he plans on doing differently, aside from cutting red tape. Some might argue that it’s still early in the game to expect such details. But in reality, it isn’t.