Just over three weeks ago, voters from across the country went to the polls or mailed in their ballots to determine who would lead our country forward over the next four years. While several seats were up for grabs in the House of Representatives and the Senate, most of Wall Street was focused on the race for the White House.
While not all aspects of legislation on Capitol Hill affect the stock market, elected officials are responsible for shaping fiscal policies that can promote or hinder business growth.
Start your morning smarter! Wake up with Breakfast news in your inbox every market day. Register for free »
In the early morning hours of November 6, the Associated Press called the election for former President Donald Trump, who ultimately earned 312 electoral votes to 226 for Democratic Party presidential candidate Kamala Harris.
Former President and President-elect Donald Trump delivers remarks. Image source: Official White House photo by Andrea Hanks.
Investors had plenty of reason to smile during Trump’s first term in the Oval Office. From his inauguration on January 20, 2017, until President Joe Biden took office on January 20, 2021, Trump oversaw the respective returns in the mature stock-driven economies. Dow Jones Industrial Average(DJINDICES: ^DJI)benchmark S&P500(SNPINDEX: ^GSPC)and innovation-driven Nasdaq Composite(NASDAQINDEX: ^IXIC) of 57%, 70% and 142%.
Despite overcoming the odds and becoming only the second president to serve in non-consecutive terms (Grover Cleveland is the other), newly elected President Donald Trump is about to make dubious stock market history when he takes office for his second term.
Despite all three major stock indexes surging after Election Day, President-elect Trump will enter the Oval Office under extremely challenging circumstances. More specifically, no new president has ever inherited a stock market as expensive as the one we’re looking at today.
Granted, value is in the eye of the beholder, and what one investor finds attractive from a valuation perspective may be the opposite for someone else. But according to a historically flawless valuation tool, there have only been a few times since the early 1870s when the stock market has been this pricey.
Most investors are probably familiar with the price-to-earnings ratio (P/E), which divides a company’s share price into its earnings per share (EPS) over the trailing twelve months. The traditional price-to-earnings ratio can be a great tool to quickly assess the relative value of mature stocks, but is often lacking in the sense that it does not take into account future growth potential and problems during shock events.
By comparison, the S&P 500’s Shiller P/E ratio, also known as the cyclically adjusted P/E ratio, or CAPE ratio, is based on the average inflation-adjusted EPS over the past ten years. Examining ten years of earnings data softens the impact of shock events and leads to apples-to-apples comparisons of valuations.
S&P 500 Shiller CAPE Ratio data according to YCharts.
As of the closing bell on November 25, the S&P 500’s Shiller P/E reached 38.20, which is roughly a high value for the current bull market, and more than double the 153-year average of 17.17, when tested afterwards. to January 1871. More importantly, this is the third highest Shiller price-to-earnings ratio during an ongoing bull market over the past 153 years.
The only two times the stock market was more expensive than it is now was before the burst of the dotcom bubble, with the S&P 500 and Nasdaq Composite losing 49% and 78% of their value respectively, and in late 2021/early 2022. The Dow Jones, S&P 500 and Nasdaq Composite all experienced bear market declines in 2022, with the . Nasdaq is again the hardest hit.
And it’s not just the Shiller price-to-earnings ratios that portend trouble for Wall Street. The valuation tool that Warren Buffett once called “probably the best measure of where valuations are at a given point in time” reached an all-time high in November.
The ‘Buffett Indicator’, which distributes the market capitalization of listed companies (via the Wilshire 5000 Index) in gross domestic product (GDP), reached the 200% mark for the first time ever in October and reached almost 206% this month. The average for the Buffett indicator since 1970 is about 85%, with highs of 144% before the dot-com bubble and 107% before the financial crisis.
These historically accurate indicators suggest that President-elect Trump may be overseeing a significant stock market correction.
Image source: Getty Images.
Even though incoming President Trump seems to have fate against him from a historical valuation perspective, time is an invaluable ally that works to his and investors’ advantage.
For example, although peaks and troughs within an economic cycle are inevitable, these periods of growth and contraction are not linear. Since the end of World War II 79 years ago, the US has weathered a dozen recessions. Three-quarters of these recessions disappeared in less than a year, while the remaining three recessions lasted no longer than 18 months.
On the other side of the coin, the vast majority of economic expansions lingered for several years, including two periods when the U.S. economy grew for at least a decade. A growing economy is generally good news for corporate profits, and these growth periods last disproportionately longer than recessions.
This clear inequality also translates to the stock market.
The data set you see above was posted to social media platform 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 period, the average duration of 27 confirmed bear markets in the S&P 500 was only 286 calendar days, or 9.5 months, with the longest bear market lasting 630 calendar days (January 11, 1973 through October 3, 1974). ).
Meanwhile, the typical bull market in the S&P 500 has lasted 1,011 calendar days, or 3.5 times longer, since September 1929. Furthermore, 14 of the 27 bull markets, including the current bull market, have surpassed the longest bear market by calendar day intervals.
Although we will never be able to determine when stock market corrections will occur, how long they will last, or how steep the eventual decline will be, history decisively shows that patience is rewarded on Wall Street.
Finally, there is reason to be hopeful, with the S&P 500 posting an average annual return of 14.52% since 1926 under unified Republican leadership, even as select valuation tools sound short-term warnings.
Have you ever felt like you missed the boat on buying the most successful stocks? Then you would like to hear this.
On rare occasions, our expert team of analysts provides a “Double Down” Stocks recommendation for companies they think are about to pop. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
Nvidia:If you had invested $1,000 when we doubled in 2009,you would have $355,011!*
Apple: If you had invested $1,000 when we doubled in 2008, you would have $44,516!*
Netflix: If you had invested $1,000 when we doubled in 2004, you would have $470,586!*
We’re currently issuing ‘Double Down’ warnings for three incredible companies, and another opportunity like this may not happen anytime soon.
See 3 “Double Down” Stocks »
*Stock Advisor returns November 25, 2024
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
