The inauguration is soon to take place where Donald Trump will be christened as the 47th President, only the second in history to serve discontinuous terms. Wall Street couldn’t contain its joy, celebrating ahead of time. Post the results of the elections, the distinguished Dow Jones Industrial Average, the standard S&P 500, and the Nasdaq, rich with growth shares, triumphed by reaching all-time closing highs. This only continues from where it left off – the fruitful gains enjoyed by Wall Street’s prime indexes during Trump’s initial tenure.
This period from 20th January 2017 to 20th January 2021 saw the Dow Jones, S&P 500 and Nasdaq Composite experience a surge of a remarkable 57%, 70% and 142% respectively. Despite this impressive history, Wall Street wisdom advises that ‘past performance does not guarantee future results’. Trump’s preference to instate tariffs from day one of his term has been a point of contention, causing an unnecessary stir about a potential downfall of American businesses and a dip in the stock market.
However, history observes that the fears, like the ones about tariffs, concerning Trump’s presidency often tend to succumb hilariously to the overall economic prosperity of his term. A similar incident occurred when the then President-elect Trump presented his plan to impose a 25% tariff on imports from neighbours Canada and Mexico along with a 35% tariff on imported goods from the world’s second-largest economy, China.
These tariffs were intended to render domestic goods more price-competitive alongside foreign imports, and aimed to incentivize multinational companies to manufacture goods within the USA. Despite this steadfast vision for the sake of domestic economy, some observers could not help but cling onto the minor fluctuations caused by these policies.
Following Trump’s initial tariff announcement in 2018 and 2019, some market analysts picked up on dips in equity prices on these days, particularly for businesses cooperating with China. Rather simplistically, they were quick to draw a connection between these minor stock market fluctuations and ‘future real outcomes’. This led to a prediction suggesting the stock market might experience a falling trend once the tariffs are implemented on the inauguration day of Trump’s new term.
However, let’s not forget that stocks are known for their volatility, even a slight hint of potential change can lead to concerns of a market correction. Many investors use and are familiar with the price-to-earnings ratio (P/E), which determines a company’s value by dividing its share price by its earnings per share (EPS) of the past twelve months.
On the other hand, there’s the historically prevalent Shiller P/E ratio or cyclically-adjusted P/E ratio that evaluates the company’s share price based on the average inflation-adjusted earnings over the past decade. As of 20th December, the Shiller P/E of the S&P 500 stood at 37.68, a drastic increase from its 153-year average of 17.19. Given this discrepancy, the air was thick with concern.
Going back to January 1871, we see that this is the seventh instance the Shiller P/E surpassed 30 during a bullish market rally. In the past, such a circumstance has led to a 20-89% dip in the S&P 500, Dow Jones Industrial Average, or Nasdaq Composite. It’s important to note, though, that the Shiller P/E does not promise any concrete timeline as to when the stock market might drop.
For instance, extended high valuations lasted for weeks before coming crashing down, as in the prelude to the Great Depression in 1929. Conversely, the Shiller P/E surpassed 30 for four years before the dot-com bubble burst. Despite this, folks have let history take them on a rollercoaster of emotions, unnecessarily predicting doom and gloom no matter the elected president.
However, history can also serve as a mission of hope, specifically for those with a long-term investment outlook. While investors would love to eliminate the possibility of stock market corrections or crashes, these events are a normal part of the investing cycle.
An essential fact to be noted is that these rises and falls in investments are not linear. From September 1929 to June 2023, during the 27 bear markets recorded for the S&P 500, the average duration was roughly 286 calendar days. In contrast, a typical bull market lasted over 1011 calendar days in the 94 years that were examined.
Furthermore, 14 out of the 27 bull markets lasted longer than the longest bear market ever documented. An even deeper analysis of historical equity performance divulges a much more optimistic conclusion.
This analysis noted the rolling 20-year total returns (including dividends) for the S&P 500 since the 20th century began. It should be mentioned that even though the S&P 500 came into existence only in 1923, researchers found ways to track the performance of its elements in other indexes up until 1900.
The result of these foresights resulted in 105 ending periods displaying positive returns. In simple terms, if one had purchased an index fund of the S&P 500 just before the Great Depression of 1929 or before Black Monday of 1987 and held on to it for 20 years, they still would have made a profit.
Furthermore, the data displayed that the stock market always ended up serving patient investors well, regardless of the ruling party. By organizing the political aspects of this data, it was evident that the 20-year total returns were always significantly positive.
In conclusion, concerns and negative speculations are minor footnotes in the grand scheme of the robust results that stock market investors have enjoyed historically. Regardless of who is in power, the potential for gains in the long-term investment horizon remains largely unaffected, if not always positive.