Trump’s back in office, the market’s been hot, but is a crash lurking around the corner? History says… maybe.
Key Points
- The stock market has performed well during Trump’s current term, but historical data suggests potential headwinds.
- The Shiller P/E ratio, a key valuation metric, is at its second-highest level in history, a possible warning sign.
- Historically, Republican presidencies have often coincided with recessions.
- Midterm election years tend to bring increased market volatility.
Historical Headwinds for the Stock Market
Shiller P/E Ratio
The Shiller Price-to-Earnings (P/E) Ratio (a valuation tool using average inflation-adjusted earnings over the past 10 years) is flashing a warning. It’s super high right now.
Throughout January, the Shiller P/E Ratio hovered between 39 and 41. That makes it the second-most expensive the stock market has been in history.
Historically, when the Shiller P/E ratio goes above 30, the stock market tends to see some major drops. We’re talking 20% to 89% declines in major indexes.
Presidential Party and Recessions
Here’s a weird one: Since 1913, every Republican president has overseen the *start* of a recession.
Of course, the stock market isn’t perfectly tied to the economy, but a weak economy *usually* means lower corporate profits. Recessions can weigh heavily on Wall Street.
Midterm Election Volatility
It’s a midterm election year, and those can get wild. “Midterm years tend to see their ultimate low later in the year and have some of the largest intra-year corrections,” according to Ryan Detrick, CMT, Chief Market Strategist at Carson Group.
Since 1950, the average midterm drawdown (peak-to-trough decline) for the S&P 500 has been 17.5%. Political uncertainty tends to make investors nervous.
The reason? Midterm elections can shake up Congress. Even a small shift in seats could lead to gridlock.
Don’t Panic: History Also Favors Optimism
Zooming out is key. Stock market drops are normal. Think of them as the cost of admission to the world’s best wealth-building machine.
These downturns tend to be short-lived. For example, the COVID-19 crash hit its low point in just 33 days.
Bull markets, on the other hand, tend to last way longer.
The Long Game
According to Bespoke Investment Group, the average S&P 500 bear market hits its low after about 9.5 months. But the average bull market lasts almost three years.
Crestmont Research looked at rolling 20-year returns since 1900. Their research showed that *every* 20-year period had positive returns for the S&P 500.
Even with wars, crashes, and pandemics, the S&P 500 has *always* been higher after 20 years.
Stocks Mentioned
- ^DJI: Dow Jones Industrial Average +2.47% (from original article date)
- ^GSPC: S&P 500 +1.97% (from original article date)
- ^IXIC: Nasdaq Composite +2.18% (from original article date)
What This Means For You
- Don’t panic sell: Market drops happen. Stay calm and remember your long-term goals.
- Review your portfolio: Make sure your investments still match your risk tolerance.
- Consider dollar-cost averaging: Investing a fixed amount regularly can help smooth out volatility.
- Stay informed: Keep an eye on economic news, but don’t obsess over short-term market swings.
- Talk to a financial advisor: If you’re unsure, a pro can help you navigate these waters.
Source: www.fool.com
