Will the stock market collapse under Donald Trump’s presidency? Here’s what the story has to say.

November was a busy month for Wall Street. It represented the heart of the earnings season for many of America’s most influential companies and featured key economic reports that will shape the Fed’s monetary policy in coming quarters.

But perhaps more importantly, November resolved the critical question of “Who will lead America forward over the next four years?” » Shortly after polls closed on election night, the Associated Press declared former President Donald Trump as the new president-elect.

The stock market soared during Trump’s first term in the White House, with mature stock markets fueled by stocks. Dow Jones Industrial Average (^DJI -0.22%)on a large scale S&P500 (^GSPC 0.82%)and focused on innovation Nasdaq Composite (^IXIC 1.77%) up 57%, 70% and 142% respectively.

But to quote Wall Street’s favorite warning: “Past performance is no guarantee of future results.” »

As the Dow Jones, S&P 500 and Nasdaq Composite soar into uncharted territory since Election Day, it raises questions about the validity of the current bull market rally and whether a stock market crash awaits President-elect Trump.

Political concerns persist

As is the case after every major election, there are more questions than answers when it comes to what policies the Trump administration will be able to implement, as well as the impact those policies will have could have on the American economy and/or stock market. . Although having a unified government – Republicans hold a majority of seats in both houses of Congress – should, on paper, help Trump pass key pieces of legislation, the Republican majority in the House is narrow enough that this is far from being a guarantee.

Perhaps the biggest political concern involves President-elect Trump’s desire to impose tariffs on goods imported into the United States. He recently outlined a plan to implement day one tariffs of 25% on goods from Canada and Mexico, as well as 35% on imports. of China, the world’s second largest economy in terms of gross domestic product (GDP).

The goal of the tariffs is to encourage domestic manufacturing and make artisanal products more competitive with those imported from foreign markets. But the tariffs risk raising prices for businesses and consumers and reigniting the current rate of inflation. With the country’s central bank currently engaged in a cycle of rate easing, this could position the US economy for a period of stagflation if the current inflation rate were to rise significantly.

US government debt data from YCharts.

There is also some concern about the national debt. With the exception of 1998 to 2001, the federal government has spent more than it brought in every year since 1970. The rate at which the national debt is growing is unsustainable in the long term.

While Republicans traditionally look for ways to cut federal spending, Trump’s plan also aims to cut corporate and/or individual tax rates. Although an even lower corporate income tax rate would likely boost stock buybacks, it risks further widening the federal deficit.

Short-lived stock market crash is a possibility, history says

But rather than focusing on the “what ifs?” » that follow every major election cycle, let’s take a closer look at what history tells us about the likelihood of a stock market crash looming during Trump’s second term.

While there is no definitive measuring or forecasting tool that can predict significant short-term movements in the Dow Jones, S&P 500, and Nasdaq Composite with 100% accuracy, there are a number of events and correlative data points that have very strongly correlated with large upward or downward movements in the broader market throughout history. A few of these indicators suggest that a short-lived stock market crash is possible with Donald Trump at the helm.

Before I go any further, let me clarify that these predictions have nothing to do with Trump winning or winning the November election. If Democratic presidential candidate Kamala Harris had won, we would be having the exact same discussion with the same historical data and parameters.

That being said, Donald Trump inherits one of the most expensive stock markets in history – and that’s a fact. big issue.

S&P 500 Shiller CAPE ratio data by YCharts.

When the closing bell rang on December 6, the S&P 500’s Shiller price-to-earnings (P/E) ratio, also known as the cyclically adjusted P/E ratio (CAPE ratio), stood at 38.89 . That’s more than double its average multiple of 17.17 dating back to early 1871.

However, the bigger concern is what happened before when stock market valuations extended higher. The figure of 38.89 is the third highest during a continuous bull market spanning 153 years. The only two times Wall Street has been more expensive – before the dotcom bubble (the Shiller P/E of 44.19 in December 1999) and late 2021/early 2022 (the Shiller P/E briefly exceeded 40) – led to spectacular declines in the main indices.

After the peak of the dot-com bubble, the S&P 500 and Nasdaq Composite lost 49% and 78% of their respective values. Meanwhile, the 2022 bear market sent the Dow, S&P 500 and Nasdaq Composite falling more than 20% to their respective lows.

The “Buffett Indicator,” named after Warren Buffett’s favorite valuation tool from 2001, is also at an all-time high. This valuation measure divides the cumulative market capitalization of public companies into U.S. GDP. Since 1970, the Buffett Indicator has averaged a ratio of 85%, meaning the aggregate value of public companies is equivalent to approximately 85% of the value of US GDP. Last week, the Buffett Indicator exceeded 208%.

By historical measures, the stock market appears headed for a short but significant correction, or even a crash, in the not-too-distant future.

History Favors Patient Investors and Unified Republican Governments

But the great thing about the story is that the pendulum swings both ways. Although some valuation indicators point to trouble for Wall Street and suggest that Trump will oversee a significant decline in the Dow, S&P 500 and Nasdaq Composite during his term, the broader picture tells a completely different story.

In June 2023, analysts at Bespoke Investment Group released a dataset on social media platform , there have been 27 distinct bear and bull markets spanning 94 years (until June 2023).

Bespoke’s data set shows that the average S&P 500 bear market lasts only 286 calendar days, or about 9.5 months. Additionally, seven out of 27 bear markets reached their respective nadir in 101 days or less.

For comparison, the typical S&P 500 bull market lasted 1,011 calendar days, approximately 3.5 times longer than the average S&P 500 bear market. Additionally, more than half (14 of 27) of the markets Bull markets last longer than the longest bear market (630 calendar days). Simply being patient has allowed investors to grow their wealth on Wall Street over time.

Furthermore, Wall Street historically does very well when Republicans control the White House and both houses of Congress. From 1926 to 2023, there were 13 years of unified Republican government, and the S&P 500 had an average annual return of 14.52% during those years, based on data from Retirement Researcher.

To be fair, the stock market is doing well no matter how you arrange the pieces of the policy puzzle, with positive average annual returns in all scenarios. But with the exception of a Democratic president and a divided Congress, a unified Republican government has generated the highest average annual returns in nearly a century.

Even if a short-lived crash occurs during President-elect Trump’s second term, history suggests it would present a phenomenal opportunity for patient investors.