A New Era for the Stock Market: Can Trump’s Second Term Bring Similar Success?
As the curtain closes on 2024, investors have every reason to celebrate. The iconic Dow Jones Industrial Average, broad-based S&P 500, and growth stock-propelled Nasdaq Composite all finished the year higher, with record-closing highs abound. But the question on everyone’s mind is: Can the stock market soar again with Trump at the helm?
Catalysts for Growth
The rise of artificial intelligence, excitement surrounding stock splits, better-than-expected corporate earnings, and Donald Trump’s November victory all contributed to the market’s upward trajectory. During his first term, the Dow Jones, S&P 500, and Nasdaq Composite rocketed higher by 57%, 70%, and 142%, respectively. But can history repeat itself?
Mixed Bag for Stocks
While Trump’s policies may bring some benefits, such as lower personal and corporate income tax rates and reduced regulation in select sectors, they also pose risks. Tariffs could impact trade relations between the U.S. and China, as well as other allies, potentially harming the economy and reigniting inflation. On the other hand, deregulation could foster a more lucrative merger and acquisition environment, leading to increased share repurchases and boosted earnings per share.
Valuation Concerns
The stock market’s valuation is a crucial factor in determining its potential for growth. The S&P 500’s Shiller P/E ratio, a more comprehensive measure of value, stands at 37.79, near its 2024 high. This is more than double the average reading of 17.19 since 1871. Historically, when the Shiller P/E ratio has risen above 30, the market has experienced significant weakness, with the Dow Jones, S&P 500, and/or Nasdaq Composite shedding 20% to 89% of their value.
Time and Wealth-Building
Despite the uncertainty, there is a clear correlation between time and wealth-building on Wall Street. Bear markets and corrections are a normal part of the investing cycle, but they are typically shorter-lived than bull markets. In fact, the average bear market slide lasts around 9.5 months, while the typical bull market endures roughly 3.5 times as long. Moreover, all 105 rolling 20-year periods since 1900 have been decisively profitable for investors.
Long-Term Upside
Even if the stock market fails to recapture the glory it enjoyed during Trump’s first term, history points to long-term upside for equities. While there are risks and uncertainties, the data suggests that investing in the stock market can be a profitable strategy over the long haul.
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