A little over three weeks ago, voters from across the country headed to the polls or mailed in their ballots to determine who would lead our country forward over the next four years. While multiple seats were up for grabs in the House and Senate, most of Wall Street was focused on the race for the White House.
Although not all aspects of legislation on Capitol Hill have bearing on the stock market, elected officials are responsible for shaping the fiscal policy that can aid or inhibit corporate growth.
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During the early morning hours of Nov. 6, the Associated Press called the election for former President Donald Trump, who ultimately earned 312 electoral votes to 226 for Democratic Party presidential nominee Kamala Harris.
Investors had plenty of reason to smile during Trump’s first term in the Oval Office. From his inauguration on Jan. 20, 2017 until President Joe Biden took office on Jan. 20, 2021, Trump oversaw respective returns in the mature stock-driven Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and innovation-fueled Nasdaq Composite (NASDAQINDEX: ^IXIC) of 57%, 70%, and 142%.
Despite beating the odds and becoming only the second president to serve in nonconsecutive terms (Grover Cleveland being the other), President-Elect Donald Trump is set to make dubious stock market history when he takes office for his second term.
Despite all three major stock indexes soaring after Election Day, President-Elect Trump will be entering the Oval Office under extremely challenging circumstances. More specifically, no incoming president has ever inherited a stock market as pricey as the one we’re looking at today.
Admittedly, value is in the eye of the beholder, and what one investor finds attractive from a valuation standpoint may be the opposite for someone else. But according to one historically flawless valuation tool, there have only been a select few times since the early 1870s where the stock market has been this pricey.
Most investors are likely familiar with the price-to-earnings (P/E) ratio, which divides a company’s share price into its trailing-12-month earnings per share (EPS). The traditional P/E ratio can be a fine tool for quickly assessing relative value for mature stocks, but it’s often lacking in the sense that it fails to factor in future growth potential and struggles during shock events.
By comparison, the S&P 500’s Shiller P/E ratio, which is also commonly known as the cyclically adjusted P/E ratio, or CAPE ratio, is based on average inflation-adjusted EPS from the previous 10 years. Examining 10 years’ worth of earnings data smooths out the impact of shock events and leads to apples-to-apples valuation comparisons.
As of the closing bell on Nov. 25, the S&P 500’s Shiller P/E reached 38.20, which is or more less a high reading for the current bull market, and more than double the 153-year average of 17.17, when back-tested to January 1871. More importantly, this marks the third-highest Shiller P/E reading during a continuous bull market over the last 153 years.
The only two times the stock market has been pricier than it is now was prior to the dot-com bubble bursting, which saw the S&P 500 and Nasdaq Composite respectively lose 49% and 78% of their value, and during late 2021/early 2022. The Dow, S&P 500, and Nasdaq Composite all endured bear market declines in 2022, with the Nasdaq, once again, getting hit the hardest.
And it’s not just the Shiller P/E that’s foreshadowing trouble for Wall Street. The valuation tool Warren Buffett once touted as “probably the best single measure of where valuations stand at any given moment,” hit its highest reading ever in November.
The “Buffett Indicator,” which divides the market cap of publicly traded companies (via the Wilshire 5000 Index) into gross domestic product (GDP), topped 200% for the first time ever in October and nearly reached 206% this month. The average for the Buffett indicator since 1970 is about 85%, with peaks of 144% prior to the dot-com bubble and 107% before the financial crisis.
These historically accurate indicators suggest President-Elect Trump may oversee a sizable stock market correction.
Even though incoming President Trump appears to have the deck stacked against him from a historic valuation standpoint, time is an invaluable ally that’s working in his and investor’s favor.
For instance, though peaks and troughs within an economic cycle are inevitable, these periods of growth and contraction aren’t linear. Since World War II ended 79 years ago, the U.S. has worked its way through a dozen recessions. Three-quarters of these downturns resolved in less than a year, with the remaining three recessions failing to surpass 18 months in length.
On the other side of the coin, the overwhelming majority of economic expansions stuck around for multiple years, including two periods where the U.S. economy grew for at least 10 years. An expanding economy is typically good news for corporate earnings, and these periods of growth last disproportionately longer than recessions.
This marked disparity translates to the stock market, as well.
The data set you see above was posted on social media platform X in June 2023, shortly after the broad-based S&P 500 was confirmed to be in a new bull market following the 2022 bear market. The researchers at Bespoke Investment Group calculated the calendar-day length of all 27 bear and bull markets in the S&P 500 dating back to the start of the Great Depression in September 1929.
Over a 94-year stretch, the average length of 27 confirmed bear markets in the S&P 500 was just 286 calendar days, or 9.5 months, with the longest bear market lasting 630 calendar days (Jan. 11, 1973 through Oct. 3, 1974).
Meanwhile, the typical S&P 500 bull market has stuck around for 1,011 calendar days, or 3.5 times as long, since September 1929. What’s more, 14 of the 27 bull markets, including the current bull market, have outpaced the lengthiest bear market, in terms of calendar days.
Even though we’re never going to be able to pinpoint when stock market corrections will occur, how long they’ll last, or how steep the ultimate decline will be, history decisively shows that patience is rewarded on Wall Street.
Lastly, with the S&P 500 seeing an average annual return of 14.52% since 1926 under unified Republican leadership, there’s reason to be hopeful, even with select valuation tools blaring warnings over the short term.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
President-Elect Donald Trump Is About to Make Dubious Stock Market History was originally published by The Motley Fool
Source: finance.yahoo.com