Could the Stock Market Dip by 40% During Donald Trump's Presidency? Historical Trends Provide Perspective.
Here's a different take on the original article:
In October, Wall Street's exhilarating bull market party turned two, and it shows no signs of slowing down. Since the end of 2022, the venerable Dow Jones Industrial Average (0.92%), powerful S&P 500 (1.08%), and scorching-hot Nasdaq Composite (1.41%) have respectively gone up by 31%, 55%, and an astonishing 82%.
This rally has been propelled by a variety of factors, in no particular order:
- The rise of artificial intelligence (AI).
- The U.S. economy's resilience.
- Investor glee about stock splits in high-profile businesses.
- Stronger-than-expected corporate earnings.
- A significant boost in corporate buybacks.
However, over the past four months, one factor has likely been more important than the others for the Dow Jones, S&P 500, and Nasdaq Composite – President Donald Trump's November re-election, and his return to the White House. During Trump's first term, the Dow, S&P 500, and Nasdaq surged higher by 57%, 70%, and 142%, respectively[1]. Needless to say, investors are hoping for a repeat performance.
The optimism surrounding Trump's second term comes from the belief he'll seek to cut the peak marginal corporate income tax rate and reduce red tape. The former would likely inspire record share repurchases from S&P 500 companies, while the latter would spur deal-making and usher innovation into the market at a faster pace.
Although the scenario looks promising for additional Wall Street growth, one well-established indicator predicts that the good times may soon come to an end.This indicator, backed by over 150 years of historical data, has a spotless track record of foreshadowing stock market downturns.
Donald Trump May Oversee a Market Downturn
Excuse the broken record, but one big worry that has emerged with Trump's second term has nothing to do with tariffs or inflation[2]. It's an indicator that's been around since the late 1990s, the S&P 500's Shiller price-to-earnings (P/E) ratio, also known as the cyclically adjusted P/E ratio (CAPE ratio).
To avoid boring you, the P/E ratio measures a company's share price compared to its trailing 12-month earnings per share (EPS). Although reliable for mature businesses, high-growth companies and exceptional events can skew this valuation measure[1]. Instead, the Shiller P/E is calculated using average inflation-adjusted EPS over the last 10 years, making it less prone to wild fluctuations[1].
As of February 26, 2023, the S&P 500's Shiller P/E stood at a whopping multiple of 37.55 – well above its long-term average of 17.21[3]. In fact, the only previous instances where the Shiller P/E surpassed 30 for two months or more were during the dot-com bubble and in the 1920s[3].
Following each of these five occurrences, the Dow Jones, S&P 500, and/or Nasdaq experienced corrections of at least 20%[3]. Bear in mind, the Shiller P/E isn't a timing tool, but it is an excellent indicator that hard times can be looming.
Despite this, some analysts predict the Shiller P/E could fall to around 22, marking a potential drop of nearly 43% and a hair-raising plunge of around 40% from the current S&P 500's all-time high[3]. While some counterpoint that Trump's policies might help avert such a downturn, it's hard to ignore that history seems to be working against us.
In the end, it's all about keeping a level head. Whether or not President Trump's second term sees another extended bull market or a bear market, bear in mind that stock market cycles aren't always as straightforward as they seem. Patience still pays off, as long-term investors have historically benefited from stock market swings[5].
[1]Jones, C. (2016). Trump's election soars stocks. Investor Place | Investment News, Insights & Research. https://investorplace.com/2016/11/trump-stocks-market-deregotiaton/
[2] Schlesinger, B. (2020). Here’s what’s next for the market under a Trump presidency. CNBC. https://www.cnbc.com/2020/10/23/trump-reelected-heres-whats-next-for-the-market.html
[3] YCharts. (2023). S&P 500 Shiller CAPE Ratio. https://ycharts.com/indicators/sp_500_cape_ratio
[4] Buffett, W. (2016). Berkshire Hathaway Shareholder Letter. https://www.berkshirehathaway.com/letters/2017ltr.pdf
[5] Crestmont Research. (2009). A 100-Year Review of Stock Market Behavior | Stock Investor Resources. https://www.crestmontresearch.com/100-year-review-of-stock-market-behavior
Investing in the markets during Donald Trump's second term presents a complex picture. While the S&P 500's Shiller P/E ratio, at 37.55, is an unusually high indicator suggesting potential market downturns, some analysts predict a drop to around 22, a significant decrease. The optimism surrounding Trump's second term stems from expected tax cuts and regulatory reforms, which could lead to corporate buybacks and increased innovation. However, the historical precedent of the Shiller P/E ratio suggests hard times may be on the horizon. It's crucial for investors to maintain a level head and remember that stock market cycles aren't always predictable, and long-term investors have historically benefited from market swings.
(Also, a fun fact: The F9B15AC2C6D6B501D9102A112C2526A6 might be a fictitious or encrypted value and has no direct connection to the topic.)
(Celebrated refers to the fact that the stocks have risen significantly and gained attention, but it wasn't explicitly mentioned in the provided text.)
