Title: Lessons from the Past: A Cautionary Tale Post-President-Elect Donald Trump's Triumph – and Potential Stock Market Reprisals
Title: Lessons from the Past: A Cautionary Tale Post-President-Elect Donald Trump's Triumph – and Potential Stock Market Reprisals
This year has been a remarkable one for Wall Street and investors. As of Dec. 5, closing bell, the ageless Dow Jones Industrial Average (DJI, 0.25% increment), the benchmark S&P 500 (GSPC, 0.16% increase), and the growth-centric Nasdaq Composite (IXIC, -0.06% decrease) have individually soared by 19%, 27%, and 31% since January.
The two-year bull market on Wall Street is fueled by various catalysts. One such factor is the AI (artificial intelligence) revolution, which could provide a surge in growth potential for businesses. Another factor is better-than-expected operating results from Wall Street's most influential companies.
However, the latest and perhaps most exciting catalyst is arguably the election of President-elect Donald Trump in November.
Trump's return to the White House in January is likely to bring about less stringent banking regulations, an increase in merger and acquisition activity, and potentially a 29% reduction in the corporate income tax rate for domestic manufacturers. Trump's proposals are undeniably investor-friendly.
But history offers a cautionary tale as Donald Trump prepares to take office in six weeks.
Republicans and recessions: An uncomfortable correlation
While no foolproof forecasting tool exists on Wall Street, history shows a striking correlation between Republican presidents and U.S. recessions.
Over the past 111 years, there have been 10 Republican presidents and nine Democratic ones. Interestingly, four out of the nine Democratic presidents have never experienced a recession that started during their term. This implies that President Joe Biden, in his last six weeks in office, is unlikely to endure a recession declaration.
On the other hand, Republican presidents have overseen 13 recessions since 1913. Donald Trump became the latest addition to this list due to the COVID-19 pandemic-induced recession.
Warning signs for the U.S. economy and stock market
As Trump takes office for his second term, he will inherit a challenging set of circumstances. While the major indices have reached record-breaking highs following the election, warning signs for the U.S. economy and the stock market are emerging.
For example, United States' M2 money supply underwent the most significant year-over-year decline since the Great Depression in 2023. Historically, such instances have been linked to economic depressions and high unemployment levels.
Furthermore, the longest yield-curve inversion on record was registered between the 3-month Treasury bill and the 10-year Treasury bond. While an inverted yield curve does not guarantee a recession, every recession since World War II has been preceded by one.
Moreover, several flawless valuation measures are sending clear-cut red flags. The S&P 500's Cyclically Adjusted P/E ratio (Shiller P/E or CAPE ratio) climbed to 38.81 on Dec. 5 – significantly higher than its average reading of 17.17 since 1871. This marked the third-highest reading during a continuous bull market.
The notorious "Buffett Indicator" also reached a record high in December, with the market value of all publicly traded companies divided by U.S. GDP exceeding 208%. Way above its average of 85% since 1970.
History hints at patient investors' triumph
Despite these warning signs, the nonlinear nature of the economic cycle offers a glimmer of hope for patient investors.
Since World War II, all 12 recessions have either ended within a year or lasted no longer than 18 months. While recessions can evoke emotion-driven moves in the stock market, they are generally short-lived.
Moreover, the U.S. economy and corporate earnings tend to grow over extended periods.
The Crestmont Research data, examining the rolling 20-year total returns of the broad-based S&P 500 since 1900, has an intriguing takeaway. All 105 rolling 20-year periods, spanning from 1919 to 2023, resulted in positive total returns, implying that investors who had remained patient in the stock market throughout these periods would have always ended up with a profit, irrespective of the political climate.
In conclusion, despite Republican presidents' historical association with U.S. recessions, patient investors stand a good chance of reaping rewards despite the challenges that President-elect Donald Trump's second term may bring.
In light of the historical correlation between Republican presidents and economic recessions, some investors might be worried about potential economic challenges during President-elect Donald Trump's second term. However, the data from Crestmont Research suggests that patient investors, who remain invested in the stock market for extended periods, have Historically seen positive total returns, regardless of the political climate. Therefore, investing wisely in finance and money, such as diversifying portfolios and considering long-term investment strategies, could potentially lead to profit, even during challenging economic times.
Given the recent increases in major indices and the warning signs emerging in the U.S. economy and stock market, investing in various sectors and considering a mix of stocks, bonds, and other assets might be a prudent approach for investors seeking to make the most of their finance and money. By actively monitoring the market trends and adjusting investment strategies accordingly, investors could potentially mitigate some of the risks and take advantage of opportunities that may arise during Trump's second term.