Key Points:
- The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite posted remarkable growth during Donald Trump’s first term.
- However, President-Elect Trump will now inherit the priciest stock market in 153 years.
- Despite high valuations and potential challenges, long-term trends favor patient investors.
As the dust settles from a hard-fought presidential election, the financial world is abuzz with the implications of Donald Trump’s return to the Oval Office. Elected with 312 electoral votes compared to Kamala Harris’s 226, Trump becomes only the second U.S. president in history, after Grover Cleveland, to serve nonconsecutive terms. While his first tenure saw the stock market deliver outstanding returns, his upcoming term presents a vastly different landscape—one that could set a new, dubious precedent in stock market history.
During Trump’s first presidency from January 2017 to January 2021, the major stock indices soared. The Dow Jones Industrial Average rose by 57%, the S&P 500 climbed 70%, and the Nasdaq Composite skyrocketed 147%, powered by innovation in technology and fiscal policies that were generally market-friendly. However, as Trump prepares to retake office in 2025, Wall Street analysts are ringing alarm bells. Several valuation metrics indicate that no incoming president has ever inherited a stock market as richly valued as this one, signaling possible turbulence ahead.
A Stock Market Steeped in Sky-High Valuations
The Shiller price-to-earnings (P/E) ratio, often referred to as the cyclically adjusted P/E (CAPE) ratio, provides a historical perspective on stock market valuations. Unlike traditional P/E ratios, which evaluate short-term earnings, the CAPE ratio considers inflation-adjusted earnings over a 10-year period, offering a more stable view of market trends. As of late November 2024, the CAPE ratio for the S&P 500 reached a staggering 38.2, more than twice the historical average of 17.17 since 1871. This places the current market among the priciest in history, surpassed only by valuations during the dot-com bubble of the late 1990s and the speculative highs of 2021–2022.
Equally alarming is the so-called “Buffett Indicator,” named after renowned investor Warren Buffett. This metric, which compares the market capitalization of publicly traded companies to the nation’s gross domestic product (GDP), hit an all-time high of 206% this month. For context, the historical average for this indicator since 1970 has hovered around 85%. The previous peaks—144% before the dot-com crash and 107% prior to the 2008 financial crisis—preceded severe market downturns.
These signals suggest a frothy market environment, one where a correction could loom on the horizon. While history doesn’t guarantee future outcomes, these metrics have proven reliable harbingers of volatility in the past.
Time: The Investor’s Ultimate Ally
Despite these daunting valuation challenges, history offers a powerful reassurance: the long-term trajectory of the stock market is overwhelmingly positive. Economic expansions tend to last significantly longer than recessions, and bull markets often outlive bear markets by a wide margin.
Since the end of World War II, the U.S. has experienced 12 recessions. Most were relatively short-lived, with three-quarters resolving in less than a year. In contrast, economic expansions typically stretch on for several years, including two periods of uninterrupted growth that lasted more than a decade. This extended economic growth translates directly to stock market performance, where bull markets historically outlast bear markets by a factor of 3.5.
Data from the S&P 500 further underscores this dynamic. Over the past 94 years, the average bear market has lasted just 286 days, or about 9.5 months. Meanwhile, the average bull market has endured for over 1,000 days. Even the longest bear markets pale in comparison to the duration and strength of bullish periods. For investors, this means that patience and a long-term perspective can turn short-term volatility into opportunity.
A Political Silver Lining
Politics also play a role in shaping market outcomes, albeit indirectly. Historical data reveals that the S&P 500 has delivered an average annual return of 14.52% during periods of unified Republican control in Washington. While legislative gridlock often tempers market optimism, unified governance can pave the way for fiscal policies that boost corporate growth.
Moreover, Trump’s track record of fostering a business-friendly environment during his first term could inspire cautious optimism among investors. His administration’s tax cuts and regulatory reforms contributed to robust corporate earnings and stock market gains. However, whether similar strategies will work in a vastly different economic climate remains to be seen.
Key Takeaways
- Record Valuations Pose Risks: The Shiller P/E and Buffett Indicator signal historically high market valuations, suggesting potential challenges for the incoming administration.
- Long-Term Growth Outweighs Short-Term Turmoil: Historical data shows that bull markets significantly outlast bear markets, highlighting the value of patience and a long-term investment approach.
- Policy Matters: Unified government and pro-business policies could provide tailwinds for the market, even amid high valuations.
Conclusion
As President-Elect Donald Trump prepares to assume office, the stock market’s unprecedented valuations create a unique challenge. While history suggests that corrections are inevitable, it also shows that economic expansions and bull markets prevail over time. For investors, the lesson is clear: patience, diversification, and a focus on long-term goals remain the keys to success. Whether Trump’s second term will usher in a new era of prosperity or faceheadwinds, one certainty remains—markets, like history, tend to reward those who stay the course.
