A New Era for Wall Street: Will Trump’s Tariffs Derail the Bull Market?
In just a few short weeks, Donald Trump will take the oath of office, becoming only the second U.S. president to serve nonconsecutive terms. As the country prepares for this new chapter, Wall Street is already celebrating, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all reaching record-closing highs since Election Day. This upward trend is a continuation of the robust gains seen during Trump’s first term, with the Dow Jones, S&P 500, and Nasdaq Composite surging 57%, 70%, and 142%, respectively, between January 2017 and January 2021.
The Tariff Conundrum
However, there are concerns that Trump’s plan to implement tariffs on Day One could undermine American businesses and cause the stock market to plummet. History suggests that this is not an unfounded fear. According to an analysis by Liberty Street Economics, Trump’s tariffs have had a decisively negative impact on U.S. equities exposed to countries where those tariffs were targeted. The authors of the study found that higher input tariffs make it difficult for U.S. manufacturers to compete on price with foreign businesses, leading to a negative shift in equity prices.
A Double Whammy for Investors
In addition to the tariff concerns, investors should also be aware of the warning signs from one of Wall Street’s top valuation indicators. The S&P 500’s Shiller P/E Ratio, which is based on average inflation-adjusted earnings per share from the previous 10 years, is currently sitting at 37.68, more than double its 153-year average of 17.19. Historically, when the Shiller P/E has topped 30, it has been followed by a 20% to 89% decline in the S&P 500, Dow Jones Industrial Average, and/or Nasdaq Composite.
A Beacon of Hope
While these warning signs may seem ominous, history also offers a beacon of hope for investors. Despite the inevitable ups and downs of the investing cycle, the data suggests that patient investors can still reap significant rewards. According to Bespoke Investment Group, the average calendar-day length of S&P 500 bull markets is significantly longer than that of bear markets, with 14 out of 27 bull markets lasting longer than the longest bear market. Additionally, Crestmont Research’s analysis of rolling 20-year total returns of the S&P 500 since 1900 shows that all 105 ending periods would have generated a positive total return.
Investing for the Long Haul
Ultimately, investors must take a step back and consider their investment horizon. While short-term market fluctuations can be unsettling, the data suggests that a long-term approach can help mitigate these risks. By adopting a patient and disciplined investment strategy, investors can ride out the inevitable ups and downs of the market and reap the rewards of their investments.
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