Spring has officially sprung — and so has election season. In seven months, Americans will head to the polls to determine who’ll lead the United States over the next four years. While there are plenty of avenues to politics that don’t intersect with investing, the fiscal policy changes signed into law by the president of the United States can impact everything from corporate earnings to the U.S. economy.
Sporting nearly 1,700 delegates as of this writing, former President Donald Trump is the presumptive nominee for president from the Republican Party. During Trump’s presidency, from when he was sworn in on Jan. 20, 2017, through his departure from the White House on Jan. 20, 2021, the ageless Dow Jones Industrial Average, broad-based S&P 500, and growth-fueled Nasdaq Composite respectively gained 57%, 70%, and 142%!
But could a second term for Donald Trump send stocks off a proverbial cliff? Let’s have a closer look at the challenges that would await a Trump presidency and let history have the final say.
The potential downside catalysts for a Trump victory would take on two forms: macroeconomic catalysts that persist regardless of who wins in November, and policy-specific changes proposed by Trump that could adversely impact the U.S. economy and/or corporate earnings.
Last week, we took a closer look at some of the proposals the presumptive presidential nominee from the Democratic Party, incumbent Joe Biden, has offered that could knock the Dow, S&P 500, and Nasdaq from their all-time highs. These include suggested changes to the share buyback tax, alternative minimum corporate tax rate, and peak corporate tax rate. These actions have the potential to make reinvestment, hiring, and acquisitions less attractive to businesses, all while slowing earnings growth in an already pricey market.
For Donald Trump, there’s one glaring policy proposal that could leave corporate America and investors skittish. In early February, Trump noted in an interview on Fox News’s “Sunday Morning Futures” that he plans to institute a tariff on imported Chinese goods of up to 60% if he wins a second term. During Trump’s first term, tariffs implemented on Chinese goods led to higher prices for consumers and a strained relationship with the world’s No. 2 economy by gross domestic product. Higher costs for consumers could tip the U.S. economy into a recession.
But as noted, there are headwinds that could topple the Dow, S&P 500, and Nasdaq Composite regardless of whether it’s Donald Trump or Joe Biden at the helm come January 2025.
Additionally, stocks are pricey. The S&P 500’s Shiller price-to-earnings (P/E) ratio has topped 35, more than double its average reading dating back more than 150 years. There have only been six instances since 1871 where the Shiller P/E ratio has topped and sustained 30 during a bull market. The previous five instances were all eventually followed by a decline of at least 20% in the S&P 500 and/or Dow Jones Industrial Average. While it’s not a timing tool, it does serve as a warning that extended valuations don’t last forever.
Based on this combination of macro factors and the unknowns of Trump’s policy proposals, a plunge in stocks isn’t out of the question if he wins a second term. Thankfully, history is a two-sided coin that undeniably favors the optimistic and patient.
If there’s a silver lining for investors as we head into the heart of election season, it’s that both parties have overseen some pretty hearty gains in the Oval Office. Based on an analysis from independent financial intelligence firm CFRA Research, the S&P 500 has gained an average of 6.9% since 1945 with Republican presidents in the White House. On the flipside, the S&P 500 has risen by an average of 11.2% when Democrat presidents were in the Oval Office.
Regardless of which president finds themselves in the White House, a copious amount of data suggests long-term-minded investors are going to be positioned for success. One of the primary reasons patient investors tend to make money regardless of which political party is in charge is because of the economic cycle. While recessions are a normal aspect of the economic cycle, downturns tend to come and go rather quickly. Since the end of World War II in 1945, there have been a dozen recessions in the United States. Out of these 12 downturns, nine resolved in under a year and none of the remaining three surpassed 18 months.
Though it’s virtually impossible to predict when short-term corrections and plunges will occur on Wall Street, there’s little concern that long-term investors will be just fine if Donald Trump wins a second term as president.
