Market analysis: US stocks retreat as Trump issues a warning about tariffs

US markets have opened higher this week as investors seem to cheer Trump’s decision to elect Hedge Fund manager Scott Bessent as treasury secretary. After a series of more unconventional selections for other key positions, markets seem to be relieved that the role of treasury secretary has been assigned to a global investor with significant experience working with key top money managers, and someone who is seen to be bipartisan, having supported both the Republicans and Democrats in the past.

Both the S&P 500 and the Nasdaq 100 started the week off strong on Monday, but it was the Russell 2000 that took the top spot, up 2.6% from Friday’s close. The relief in markets brought on another round of buying even after a strong finish last week. The small-cap index has been playing catch up in recent months as the expectations for lower rates, but a resilient economy has led to a rotation from heavy hitters towards small caps. Despite the scare seen in August undoing most of the gains prior to the summer, the Russell 2000 has been making headway as the economic data has continued to show resilience and the Federal Reserve began cutting rates. 

Russell 2000 daily chart

Past performance is not a reliable indicator of future results.

A key roadblock for the continued upside in small caps could be resurgent inflationary pressures, and many believe that Trump’s tariff plans could cause this. A reason why the Russell 2000 has outperformed the Nasdaq and S&P 500 at the start of this week is the belief that Scott Bessent could influence and moderate some of Trump’s more aggressive policies that are expected to push up inflation. While it is understood that Bessent supports tariffs, he is considered to be pragmatic and reasonable and he understands that such policies can exasperate a recession, which seems to have provided CEO’s some relief. 

That said, just because the new treasury secretary can challenge Trump’s ideas it doesn’t mean that he will win those arguments. At the end of the day, Trump isn’t exactly known for taking on advice, and many of his advisers have been booted out of the administration in the past after having been branded as incompetent just for pushing back on some of his ideas. In fact, Donald Trump made sure that his intentions are taken seriously by giving markets a “wake up call” late on Monday by saying that he would slap 25% tariffs on Mexico and Canada until they better control their borders, and extra tariffs on China once he takes office in January. 

Because of this, the relief rally may be short-lived. The major US indices have already pulled back from Monday’s highs, with the Russell 2000 unable to close at a record level despite seeing a new high throughout the session.