Stock Market History and President Donald Trump
No president has ever inherited a pricier stock market. Yesterday, Donald Trump took the oath of office and a new era began for Wall Street. Following his victory in November, the broader market was propelled higher, with financial stocks surging on the prospect of less oversight. Additionally, many of stock markets most-influential businesses have jumped on the belief that Trump will target another round of corporate income tax rate cuts — at least for businesses that make their products in America. After the Tax Cuts and Jobs Act was signed into law by Trump in December 2017, stock buyback activity for S&P 500 (^GSPC 1.00%) companies soared. Investors are also excited about a repeat performance.
During Trump’s first term in the White House, the ageless Dow Jones Industrial Average (^DJI 0.78%), benchmark S&P 500, and growth-powered Nasdaq Composite (^IXIC 1.51%) galloped higher by 57%, 70%, and 142%, respectively. While Wall Street has been given plenty of reason to be excited about President Donald Trump’s second term, he’s also making ominous stock market history — and it should have investors concerned.
Among the dozens of presidents that have preceded Trump in the Oval Office, none can say they’ve inherited a pricier stock market. The most common way to measure “value” on Wall Street is with the price-to-earnings (P/E) ratio. The P/E ratio is arrived at by dividing a company’s share price into its trailing-12-month earnings per share (EPS), with a lower P/E ratio typically signifying a better value. Though the P/E ratio is a fantastic tool for quickly assessing the relative cheapness or priciness of a mature business, it can be easily tripped up by short-term shock events that disrupt corporate earnings.
This is where the S&P 500’s Shiller P/E Ratio comes into play. You’ll commonly find the Shiller P/E Ratio also referred to as the cyclically adjusted P/E Ratio (CAPE Ratio). The Shiller P/E is based on average inflation-adjusted EPS over the prior 10 years. Using a decade of inflation-adjusted earnings history means that shock events can’t skew this valuation metric. As of the closing bell on Jan. 17, the S&P 500’s Shiller P/E sat at 38.11. This marks the highest reading for an incoming president dating back to January 1871.
For context, the average Shiller P/E over the last 154 years is 17.19. Since 1871, there have only been six instances where the Shiller P/E has surpassed 30 during a bull market, including the present. What’s particularly concerning is what’s happened during previous instances where stock valuations became extended to the upside. Even with most of President Donald Trump’s policies viewed as favorable to corporate America, inheriting one of the priciest stock markets in history might pave the way for a bear market or short-lived crash during his second term.
Characteristics and Key Points
- Price-to-earnings (P/E) ratio for assessing value on Wall Street.
- Use of Shiller P/E Ratio for valuation metric stability.
- Historical data analysis to predict market downturns.
Benefits
Based on historical evidence, premium valuations tend to correct over time, offering possible buying opportunities for long-term investors. Longer bull markets imply sustained growth and positive returns for investors. Despite short-term concerns, a focus on the long game can lead to significant portfolio gains.
Continuing to hold through market fluctuations has historically led to substantial returns. While short-term challenges may arise, adapting an investment strategy that focuses on the long run can mitigate risks and ensure financial stability.
For more in-depth insight and analysis on historical market trends and strategies to navigate market downturns, accessing the official website of reputable financial institutions is crucial. Visit now to learn more and make informed investment decisions.
