Will the Stock Market Experience A Surge Under President Donald Trump's Second Term, Similar to Its Growth During His Initial Term? Insights from Historical Data.
In the final chapter of 2024, the financial realm rejoiced. The Dow Jones Industrial Average (DJIA), the broad-based S&P 500, and the growth-driven Nasdaq Composite saw a triumphant year, closing 13%, 23%, and 29% higher, respectively. All three indexes touched new record-breaking highs, setting the stage for a celebration among investors.
What pushed Wall Street to such heights? Numerous catalysts fueled this exciting growth. Artificial intelligence (AI) took center stage, igniting a flurry of innovation and investment opportunities. Stock splits also captivated investors, with companies like Tesla and Alibaba splitting their shares, driving additional interest. A series of better-than-expected corporate earnings reports bolstered market confidence. And, let's not forget the excitement surrounding the election of a familiar face, former President Donald Trump, in his bid to make history with a nonconsecutive term.
During Trump's initial term, the DJIA, S&P 500, and Nasdaq Composite had soared by 57%, 70%, and 142%, respectively. As the curtain fell on the 2024 elections, many investors wondered: Could the stock market repeat its spectacular performance with Trump back in charge?
To answer this question, let's rewind the clock and examine history.
Trump's policy proposals: A double-edged sword
With a dose of nostalgia, some investors may be eager to recapture the gains made during Trump's first term. However, it's essential to remember that those gains were often fueled by unprecedented fiscal stimuli following the COVID-19 pandemic.
Looking ahead, Trump's proposed policies present a series of potential benefits and drawbacks for the stock market.
On the positive side, Trump's push for lower personal and corporate income tax rates, as well as deregulation in select sectors, could open up opportunities for mergers and acquisitions. Moreover, Trump's previous tax cuts inspired many S&P 500 companies to engage in substantial share repurchases, boosting earnings per share (EPS) and bolstering their stock valuations.
However, some concerns remain, such as increased tariffs on trade relations, particularly with China and other key allies. These import taxes could weaken the U.S. economy and potentially reignite rates of inflation.
A historically expensive stock market: A potential challenge
As we approach the new term, doubts about the stock market's ability to maintain its momentum linger. The primary reason? The market's peak valuation.
Value measurements like the price-to-earnings (P/E) ratio can provide useful insights into a stock's worth. However, in times of economic upheaval—such as a pandemic-induced lockdown—the traditional P/E ratio might prove to be a less reliable gauge.
The far more comprehensive S&P 500's Shiller P/E ratio (also known as the cyclically adjusted P/E, or CAPE, ratio) takes into account average inflation-adjusted earnings over the last ten years. When Trump assumes office, he'll inherit one of the priciest stock markets in history, dating back to 154 years. As of the closing bell on Jan. 15, the S&P 500's Shiller P/E ratio stood at 37.79, just shy of its 2024 high of 38.9. This ratio is more than double the average reading of 17.19 going back to 1871.
Historically, stock market valuations above 30 have led to bearish results, indicating that investors should brace themselves for a potential 20% to 89% decline in the market's value. While the Shiller P/E ratio isn't a pinpoint predictive tool, it serves as a valuable reminder of the potential vulnerabilities of the market.
Long-term optimism
Despite the challenges, history dictates that the stock market has an unmatched capacity for growth, particularly over an extended period.
In a world often disillusioned by stock market corrections and bear markets, remember that these occurrences are a necessary and natural part of the investment cycle. As you step back and view the timeline, you'll see a stark contrast in the length of these cycles.
Bull markets generally last far longer than their bear counterparts, with the typical bear market slumping for just 286 calendar days (around 9.5 months), compared to bull markets that usually endure for more than 1011 calendar days, or 3.5 times longer.
More than half of all bull markets have extended beyond the longest bear market on record. This consistency in market growth is a testament to the power of long-term investing.
Even as skepticism persists about the stock market's repeat performance under Trump, history offers clear evidence of the market's long-term potential for growth.
Enrichment Data:
- During Trump's first term, the Dow Jones Industrial Average (DJIA) rose by 57%, the S&P 500 by 70%, and the Nasdaq Composite by 142%.
- Under President Joe Biden, the DJIA gained more than 56%, the S&P 500 rose by 58%, and the Nasdaq Composite also saw significant growth. However, these returns were less impressive than those achieved during Trump's first term and other past presidencies.
- The market's peak valuation in 2024, as measured by the S&P 500's Shiller P/E ratio, was historically high, indicating potential vulnerabilities. The ratio has been above 30 only six times over the past 154 years, with each instance preceding a bear market in which the market declined by 20% to 89%.
- Despite these potential risks, history suggests that the stock market typically exhibits growth over the long term. The average bull market has lasted almost four times longer than the longest bear market, and historically, all 20-year stock market timelines—dating back to 1900—have resulted in gains, despite market downturns and crashes.
- Most recently, AI and technological advancements, such as the launch of ChatGPT in late 2022, have been driving growth in the stock market. However, these trends can also lead to market volatility and uncertainty. Investors should remain vigilant and prepared for potential corrections or downturns as part of the normal investment cycle.
Investors were drawn to investing opportunities in the tech sector due to the advancements in artificial intelligence (AI), particularly with companies like Tesla and Alibaba announcing stock splits. Under Trump's proposed policies, lower personal and corporate income tax rates and deregulation in select sectors could provide opportunities for mergers and acquisitions, potentially boosting stock market performance.
However, the stock market's peak valuation in 2024, as measured by the S&P 500's Shiller P/E ratio, suggests potential vulnerabilities, with a decline of 20% to 89% possible if the ratio remains above 30.
