Stock market today, the stock market is currently facing significant pressure as investors react to potential changes in U.S. trade policy under President Trump.

U.S. markets will be closed next Monday in observance of Martin Luther King Jr. Day, coinciding with the inauguration of President-elect Trump. This could lead to a week filled with uncertainty.
 

Political Climate and the Stock Market

Daniel Von Ahlen, senior macro strategist at GlobalData TS Lombard, indicates that the political climate in Washington could pose challenges for the stock market. Von Ahlen states, "If Trump announces tariffs that are harsher than currently anticipated, or opposes the gradual tariff plan recently proposed by his economic advisory team, the stock market could come under pressure."
 

Market Valuation and Investor Sentiment

According to Von Ahlen, the stock market's susceptibility to these developments is rooted in current market valuations that suggest investors maintain an optimistic outlook. He notes that one of the primary reasons the S&P 500 has risen nearly 60% since January 2023 is Wall Street's relatively pessimistic expectations regarding U.S. economic growth and corporate earnings per share.
 

Economic Recession Predictions

"Predictions of an economic recession in 2023 and 2024 linger, meaning the threshold for exceeding these expectations is relatively low. In fact, in January 2023, the general forecast for U.S. economic growth was merely 0.3%, while the actual outcome turned out to be 2.5%, which significantly boosted stock prices," Von Ahlen mentioned in a report released this week.

Similarly, current projections for U.S. economic growth in 2024 are more than double those made at the beginning of the year. However, the general forecast for U.S. economic growth in 2025 has reached 2.1%, which is notably more optimistic than predictions from the past two years. Von Ahlen explains that this "indicates that the stock market has become more fragile amid increasing global policy uncertainty and rising valuations relative to bonds."
 

Impact of U.S. Treasury Yields

Additionally, the rise in U.S. Treasury yields following last week's non-farm payroll report suggests that better-than-expected growth will tighten financial conditions, which will weigh on the stock market. Von Ahlen states, "The ongoing struggles of the stock market this year indicate that tightening overall financial conditions (with the 30-year U.S. Treasury yield rising by 100 basis points since mid-September and the dollar index increasing by about 9%) are increasingly putting pressure on stocks, as safer assets offer higher yields."
 

Market Vulnerability

He points out that the last time the 10-year U.S. Treasury yield hit 5% was in October 2023, when the S&P 500 entered correction territory. "If the market accepts our long-held view that the Federal Reserve will not cut rates this year, then the stock market will be walking on thin ice," he warns.
 

Investment Strategy Recommendations

Considering that Trump's forthcoming tariffs may impact such a fragile market, Von Ahlen suggests the following trades: go long on U.S. high-yield credit through the iShares iBoxx High Yield Corporate Bond ETF, while shorting stocks using the SPDR S&P 500 ETF Trust, "because in this scenario, stocks may underperform credit."

Moreover, he adds that it is advisable to implement strict stop-loss measures "in the event that Trump makes more conciliatory remarks regarding tariffs."
 

Conclusion

The current environment reflects a complex interplay of political actions, economic forecasts, and market reactions. Investors will need to navigate this uncertainty carefully, as the implications of potential tariff changes and tightening financial conditions could significantly influence market dynamics in the weeks to come.
 

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. 

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.