In less than four weeks, President-elect Donald Trump will be sworn in as the 47th president and become only the second U.S. chief to ever serve nonconsecutive terms. However, Wall Street decided to kick off the event a bit early.

Since Election Day, the iconic Dow Jones Industrial Average, point of reference S&P 500 and growth stake-dependent Nasdaq have all ascended to record-closing highs. This is a continuation of the robust gains Wall Street’s major indexes enjoyed during Trump’s first term. Between Jan. 20, 2017 and Jan. 20, 2021, the Dow Jones, S&P 500, and Nasdaq Composite soared 57%, 70%, and 142%, respectively.

But to quote Wall Street’s favorite warning: “history act is no guarantee of upcoming results.”

Although stocks thrived with Trump in the Oval Office, there’s genuine concern that his desire to implement tariffs on Day One could undermine American businesses and factor the stake trade to plunge. Based on what history inform us, this isn’t out of the realm of possibilities.

Trump’s prior tariffs had a harmful result on stocks

Last month, President-elect Trump laid out his schedule to impose a 25% tariff on imports from its direct neighbors, Canada and Mexico, as well as 35% tariff on imported goods from China, the globe’s No. 2 economy.

The general purpose of tariffs is to make American-made goods more worth-competitive with those being brought in from beyond our borders. They’re also designed to inspire multinational businesses to manufacture their goods destined for the U.S. within the confines of our borders.

But according to an analysis from Liberty Street Economics, which publishes research for the Federal safety net lender of recent York, Trump’s tariffs have previously had a decisively negative impact on U.S. equities exposed to countries where those tariffs were targeted.

The four authors of Do Import Tariffs Protect U.S. Firms? make it a point to distinguish between the impacts of tariffs on outputs versus inputs. An output tariff is an added expense placed on the final worth of a excellent, such as a car imported into the country. Meanwhile, an input tariff would affect the expense of producing a final excellent (e.g., higher costs on imported steel). The authors note that higher input tariffs make it challenging for U.S. manufacturers to compete on worth with foreign businesses.

The authors also examined the stake trade returns of all publicly traded U.S. companies on the day Trump announced tariffs in 2018 and 2019. They found a obvious negative shift in ownership prices on the days tariffs were announced, with this result being most pronounced on businesses that were exposed to China.

Furthermore, the authors noted a correlation between companies that performed poorly on tariff announcement days and “upcoming real outcomes.” Specifically, these businesses experienced declines in profits, employment, sales, and labor productivity from 2019 through 2021, based on the authors’ calculations.

In other words, history would recommend that tariffs being implemented on Day One of Donald Trump’s second term can be a downside catalyst for the Dow, S&P 500, and Nasdaq Composite.

Stocks are pricey, raising concerns about a correction

Unfortunately, history has a bit of a double whammy for investors. While comparing the historic act of equities on tariff announcement days during Trump’s first term provides a limited data set, one of Wall Street’s top evaluation indicators, which can be back-tested 153 years, offers ample rationale for concern.

In other words, there’s another rationale for investors to be nervous about the trade besides tariffs: stake valuations are relatively high.

A lot of investors are probably familiar with the worth-to-profits ratio (P/E), which divides a publicly traded corporation’s distribute worth into its trailing-12-month profits per distribute (EPS). The traditional P/E ratio is a fairly effective evaluation tool that helps investors determine if a stake is cheap or expensive relative to its peers and the broad-trade indexes.

The downside to the P/E ratio is that can be easily disrupted by shock events. For instance, lockdowns that occurred during the early stages of the COVID-19 pandemic rendered the trailing-12-month EPS relatively useless for most companies for about a year.

This is where the S&P 500’s Shiller P/E Ratio, which is also known as the cyclically adjusted P/E Ratio (CAPE Ratio), can arrive in handy.

S&P 500 Shiller CAPE Ratio data by YCharts.

The Shiller P/E Ratio is based on average expense boost-adjusted EPS from the previous 10 years. Looking at a decade’s worth of expense boost-adjusted profits data makes shock events something of a moot point when assessing the evaluation of equities, as a whole.

As of the closing bell on Dec. 20, the S&P 500’s Shiller P/E sat at 37.68, which is more than double its 153-year average of 17.19. But what’s more worrisome is how the stake trade has responded following previous instances where the Shiller P/E has topped 30.

What happens when stake prices are high?

Dating back to January 1871, there have only been six instances where the S&P 500’s Shiller P/E crested 30 during a bull trade rally, including the now. Each prior occurrence was eventually followed by a 20% to 89% decline in the S&P 500, Dow Jones Industrial Average, and/or Nasdaq Composite.

To be obvious, the Shiller P/E doesn’t provide us any clues as to when stake trade downturns will commence. Sometimes stocks have extended valuations for a matter of weeks before tumbling, such as the two-month stretch preceding the commence of the Great Depression in 1929. Meanwhile, the Shiller P/E topped 30 for four years prior to the dot-com bubble bursting. Nevertheless, this historic evaluation metric suggests stocks can plunge — and it would have made no difference which presidential candidate won in November.

stake investing for the long haul usually works out

However, history can be a beacon of aspiration and encouragement, too, depending on your property horizon.

No matter how much investors would prefer to do away with stake trade corrections, bear markets, and crashes, they’re ultimately a normal and inevitable facet of the investing pattern. But what’s significant to note is that the ups and downs associated with investing aren’t linear.

For example, the analysts at Bespoke property throng calculated the average calendar-day length of S&P 500 bull and bear markets since the beginning of the Great Depression and discovered night-and-day differences between the two.

On one hand, the 27 S&P 500 bear markets between Sept. 1929 and June 2023 averaged just 286 calendar days (around 9.5 months), with the longest bear trade clocking in at 630 calendar days. On the other side of the coin, the typical S&P 500 bull trade endured 1,011 calendar days over the 94 years examined. Further, 14 out of 27 bull markets (if you include and extrapolate the current bull trade to now day) have stuck around longer than the lengthiest bear trade.

^SPX data by YCharts. YCharts S&P 500 profitability data begins in 1950.

An analysis from Crestmont Research looked back even further on the act of equities over long periods and came to an even more encouraging conclusion.

Crestmont calculated the rolling 20-year total returns (including dividends) of the S&P 500 since the commence of the 20th century. Even though the S&P didn’t officially exist until 1923, researchers were able to track the act of its components in other indexes to satisfy its back-test to 1900. This 20-year hold timeline produced 105 ending periods (1919 through 2023).

What Crestmont’s annually updated data set shows is that all 105 rolling 20-year periods would have generated a positive total profitability. Hypothetically speaking, if you had purchased an S&P 500 market portfolio just prior to the commence of the Great Depression in 1929, or before Black Monday in 1987, and held that stake for 20 years, you’d have still made money.

Crestmont Research’s data set also conclusively shows that the stake trade can make patient investors richer regardless of which political event is in power. No matter how you organize the political puzzle pieces, 20-year total returns have always been decisively positive.

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.

The Motley Fool is a USA TODAY content associate offering monetary information, analysis and commentary designed to assist people receive control of their monetary lives. Its content is produced independently of USA TODAY.

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