New President Donald Trump Is About to Make Questionable Stock History

A little more than three weeks ago, voters across the country went to the polls or mailed in their ballots to determine who would lead our country forward over the next four years. While multiple seats in the House and Senate are up for grabs, much of Wall Street is focused on the race for the White House.

While not all aspects of legislation on Capitol Hill affect the stock market, elected officials are responsible for shaping financial policy that can help or hinder corporate growth.

In the early morning hours of November 6, Associated Press calls for former President Donald Trump’s electionUltimately, he won 312 electoral votes to 226 for Democratic presidential candidate Kamala Harris.

Former President and President-Elect Donald Trump makes statements. Image source: Official White House Photo: Andrea Hanks.

Investors had plenty of reasons to smile during Trump’s first term in the Oval Office. From his inauguration on January 20, 2017, until President Joe Biden took office on January 20, 2021, Trump oversaw relative returns in mature equity-focused markets. Dow Jones Industrial Average (INDIKS: ^DJI)quality test S&P 500 (SNPINDEX: ^GSPC)and fueled by innovation Nasdaq Composite (NASDAQINDEX: ^IXIC) 57%, 70% and 142%.

Despite beating the odds and becoming the second non-consecutive president (the other being Grover Cleveland), President-elect Donald Trump is poised to make dubious stock market history when he is inaugurated for his second term.

No president has inherited a more expensive stock market

Despite all three major stock market indexes rising after Election Day, President-elect Trump will enter the Oval Office under extremely challenging conditions. More specifically, no president has ever been He inherited a stock market as expensive as the one we look at today..

Of course, value is in the eye of the beholder, and what one investor finds attractive from a valuation standpoint may be the exact opposite for another. But according to a historically perfect valuation tool, there have only been a few times since the early 1870s that the stock market has been picked to be this expensive.

Most investors are probably familiar with this topic. price-earnings (P/E) ratiodivides a company’s share price by its trailing 12-month earnings per share (EPS). The traditional P/E ratio can be a good tool for quickly assessing the relative value of mature stocks, but it is often inadequate in the sense that it fails to account for future growth potential and struggles during shock events.

By comparison, the S&P 500’s Shiller P/E ratio, also commonly known as the cyclically adjusted P/E ratio, or CLOAK ratioBased on the inflation-adjusted average EPS of the previous 10 years. Examining 10 years of earnings data softens the impact of shock events and leads to apples-to-apples valuation comparisons.

S&P 500 Shiller CAPE Ratio data Y Charts.

As of the closing bell on November 25, the S&P 500’s Shiller P/E index reached 38.20; This is a very high number for the current bull market, or more than double the 153-year average of 17.17, based on backtests. Until January 1871. More importantly, this Third highest Shiller P/E during a sustained bull market in the last 153 years.

The only two periods when the stock market was more expensive than it is now were before the burst of the dot-com bubble, when the S&P 500 and Nasdaq Composite lost 49% and 78% of their value, respectively, and during late 2021/early 2022. The Dow, S&P 500 and Nasdaq Composite have all endured bear market declines in 2022, with the Nasdaq leading the way. It’s still getting hit the hardest.

And it’s not just the Shiller P/E that portends trouble for Wall Street. The valuation tool, which Warren Buffett once touted as “probably the single best metric of where valuations stand at any given moment,” reached its highest value ever in November.

“Buffet Indicator“” which divides the market value of publicly traded companies Wilshire 5000 Index) to gross domestic product (GDP), It exceeded 200% for the first time in October and this month it reached almost 206%. The Buffett indicator has averaged about 85% since 1970; There were highs of 144% before the dot-com bubble and highs of 107% before the financial crisis.

These historically accurate indicators point to President-elect Trump could oversee a major correction in the stock market.

Image source: Getty Images.

There’s also a silver lining

Although the new President Trump seems to have the trump card against him in terms of historical valuation, time is an invaluable ally that works in his and the investor’s favor.

For example, although ups and downs are inevitable in an economic cycle, these periods of growth and contraction are not linear. Since the end of World War II 79 years ago, the United States has gone through a dozen economic recessions. Three-quarters of these downturns resolved in less than a year, while the remaining three recessions lasted no longer than 18 months.

On the other side of the coin, the vast majority of economic expansions have persisted for several years, including two periods when the U.S. economy grew for at least 10 years. An expanding economy is generally good news for corporate earnings, and these periods of growth last disproportionately longer than recessions.

This apparent inequality is also reflected in the stock market.

The dataset you see above was published on social media platform X in June 2023, shortly after broad-based sharing. S&P 500 It has been confirmed that there will be a new bull market after the 2022 bear market. Researchers at Bespoke Investment Group calculated the calendar day length of the entire 27 bear and bull markets in the S&P 500, dating back to the beginning of the Great Depression in September 1929.

Over a 94-year period, the average length of the 27 confirmed bear markets in the S&P 500 was only 286 calendar days, or 9.5 months; The longest bear market lasted 630 calendar days (January 11, 1973 to October 3, 1974). ).

Meanwhile, The typical S&P 500 bull market lasted for 1,011 calendar daysthat is, 3.5 times longer since September 1929. Moreover, 14 of the 27 bull markets, including the current bull market, have surpassed the longest bear market in terms of calendar days.

While we may never be able to determine exactly when stock market corrections will occur, how long they will last, or how steep the eventual decline will be, history unequivocally shows that patience is rewarded on Wall Street.

Finally, in the S&P 500 index Average annual return of 14.52% since 1926 under unified Republican leadership.Although selected valuation tools offer warnings in the short term, there are reasons to be hopeful.

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Sean Williams It has no position in any of the stocks mentioned. The Motley Fool has no position in any stocks mentioned. The Motley Fool has a feature disclosure policy.