Anticipated Outcome: Stock Market Performance to reach Unseen Heights in Two Decades during President Donald Trump's Tenure
The stock market bulls are in charge, and Wall Street has been celebrating a fantastic run. Year two of the current bull market saw the venerable Dow Jones Industrial Average (-0.32%), the stalwart S&P 500 (-0.29%), and the growth-driven Nasdaq Composite (-0.50%) surge by 13%, 23%, and 29% respectively, each setting numerous record-breaking closing highs.
Investors from all walks of life have rallied around a wide array of catalysts. These include the advancement of artificial intelligence, the resilience of the U.S. economy, a decline in the rate of inflation, and excitement surrounding stock splits.
But Wall Street's triumphant rally reached new heights in November post-Donald Trump's election victory. His first term in the White House saw the Dow Jones, S&P 500, and Nasdaq Composite soar by an astounding 57%, 70%, and 142% respectively. Although past performance is no guarantee of future results, the market seems to be hoping for a rehash of these extraordinary returns during Trump's second term.
However, it's crucial to consider that even though Trump's policies may lead to stock market gains, their final outcome might differ drastically from initial expectations.
Wall Street's Reasons for Anticipating Donald Trump's Return
Before delving deeper, it's vital to understand why the post-election rally in the Dow, S&P 500, and Nasdaq Composite gained momentum.
The primary catalyst for equities was removing the specter of increased corporate income tax rates, a major point of contention during the election. In comparison to Democrat nominee Kamala Harris' proposal of a 33% increase in the top marginal corporate income tax rate, President Trump advocated for further reductions.
Moreover, these tax cuts could potentially encourage American corporations to repurchase their own stock. Post-TCJA's enactment in 2017, there was a notable increase in S&P 500 companies' share buybacks. Formerly averaging around $100 billion to $150 billion per quarter, buyback activity skyrocketed to $200 billion to $250 billion in most quarters. This activity can boost earnings per share and enhance a stock's fundamental appeal to investors.
Historic Stock Market Returns Might Not Happen as Expected During Trump's Second Term
The potential for historic stock market returns during Trump's second term should not be ruled out. But it's crucial to keep in mind that the stock market consistently displays cyclical trends. And it may experience a downturn at any point.
The primary concern for Wall Street during Trump's presidency is the stock market's existing high valuation. Although deciding on what constitutes "value" on Wall Street is a matter of debate, the S&P 500's Shiller price-to-earnings ratio (P/E) has shown remarkable foresight when it comes to foreseeing bear markets. Spanning 154 years, there have only been six instances where the Shiller P/E has broached 30 during a bull market rally, including the present.
Each of the previous five instances encountered a 20% or higher decline in the Dow Jones, S&P 500, and the Nasdaq Composite. History suggests a real chance of these market indices concluding in the red when Trump's second term draws to a close.
However, long-term investors can find solace in these troubling times. Data suggests bear markets are accompanied by bull markets. This cyclical pattern has consistently rewarded patient investors over the long term.
Key Insights
- The 2020-2024 bull market saw the Dow Jones, S&P 500, and Nasdaq Composite surge by 13%, 23%, and 29%, respectively.
- President Trump's first term saw the Dow Jones, S&P 500, and Nasdaq Composite rocket by 57%, 70%, and 142%, respectively.
- Reasons behind Wall Street's enthusiasm for Trump's return include the removal of the possibility of increased corporate income tax rates and the expectation of further deregulation.
- Uncertainty, policy risks, and the stock market's high valuation have raised concerns about the performance of the stock market during Trump's second term.
- Historically, bull and bear markets have lasted different durations, with average bear markets lasting around 9.5 months and bull markets lasting over 3.5 times as long.
- The Shiller P/E Ratio, a gauge of the S&P 500's valuation, has shown a flawless track record of foreshadowing bear markets.
- Over the past 106 rolling 20-year periods, the S&P 500 has consistently produced positive total returns including dividends.
- High valuations are historically associated with lower returns in the subsequent three years.
Investors are eager to put their money into various sectors due to the promising outlook, with finance being no exception. The prospects of lower corporate income tax rates and potential deregulation have piqued investors' interests in investing.
Despite the optimism surrounding Donald Trump's return, it's essential to keep an eye on the stock market's high valuation. High valuations, as seen in the S&P 500's Shiller price-to-earnings ratio, have often signaled a potential downturn in the market.
