Following the post-election rally that saw the stock market reach new highs after Donald Trump’s return to office, most equities are now experiencing a massive sell-off.
Specifically, the benchmark S&P 500 has erased a staggering $2.5 trillion in market capitalization over the past month, now trading below its pre-election levels, according to financial markets commentary platform The Kobeissi Letter in a post on X dated January 13.
This capital hemorrhaging is sparking fears that the post-election rally has run its course, potentially leading to further losses.
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The platform highlighted the decline amid rising “term premiums,” a phrase likely to dominate in 2025. These premiums reflect the additional compensation investors demand for holding long-term debt, particularly in an environment of unstable inflation.
Skyrocketing inflation
Inflation, which had shown signs of cooling, is now resurging. Recent data reveals a significant rise in consumer inflation expectations, jumping from 2.6% to 3.3% in just a few weeks.
This shift has pushed term premiums to approximately 0.55%, the highest level in over a decade. As reported by Finbold, inflation is likely to climb further following a stronger-than-expected jobs report, which has reduced the likelihood of Federal Reserve rate cuts.
Notably, higher-term premiums signal greater uncertainty, putting pressure on long-term bonds and equities. Compounding the issue, the Fed’s previously anticipated rate cuts may now be off the table, with some analysts warning that additional rate hikes could even be on the horizon.
The Federal Reserve’s latest policy statement, which presented a hawkish outlook for 2025, also contributed to the current stock market sell-off.
The recession threat
Adding to investor unease is a steepening yield curve, which has historically preceded recessions. With the Consumer Price Index (CPI), Producer Price Index (PPI), and Personal Consumption Expenditures (PCE) inflation metrics all climbing, markets are bracing for continued volatility.
The Kobeissi Letter noted that investor sentiment may have exacerbated the recent downturn. It observed that fund managers were notably bullish heading into late 2024, with equity allocations nearing 40% and cash positions hitting record lows.
Historically, such levels of optimism have preceded major corrections, as seen during the Dot-com bubble and the 2008 financial crisis.
Meanwhile, the U.S. Dollar Index (DXY) has surged, recently breaking above 110 for the first time since November 2022. The dollar’s strength, unusual during periods of expected rate cuts, reflects heightened global demand for safe-haven assets amidst uncertainty.
Looking ahead, the intersection of rising term premiums, inflation fears, and elevated equity allocations has created a perfect storm for equities. If history repeats, these factors do not bode well for a sustained bull market.
The Kobeissi Letter also observed that the market’s current trajectory resembles prior periods of significant financial instability, signaling potential trouble ahead for stocks.
It’s worth noting that other market players, such as economist Henrik Zeberg, have echoed the possibility of a stock market crash. As reported by Finbold, Zeberg opined that the S&P 500 is likely to surge to record highs before potentially ushering in a historic market collapse.
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