President Trump just made ownership trade history — and it’s an ominous warning for investors
No president has ever inherited a pricier ownership trade.
Yesterday, Donald Trump took the oath of office and a recent era began for Wall Street.
Following his win in November, the broader trade was propelled higher, with monetary stocks surging on the prospect of less oversight.
Additionally, many of ownership markets most-influential businesses have jumped on the conviction that Trump will target another round of corporate returns responsibility rate cuts — at least for businesses that make their products in America. After the responsibility Cuts and Jobs Act was signed into law by Trump in December 2017, ownership buyback activity for S&P 500 (SNPINDEX: ^GSPC) companies soared.
Investors are also enthusiastic about the prospect of a repeat act. During Trump’s first term in the White House, the ageless Dow Jones Industrial Average (DJINDICES: ^DJI), point of reference S&P 500 and growth-powered Nasdaq Composite (NASDAQINDEX: ^IXIC) galloped higher by 57%, 70% and 142%, respectively.
While Wall Street has been given plenty of rationale to be enthusiastic about President Donald Trump’s second term, he’s also making ominous ownership trade history — and it should have investors concerned.
President Trump officially makes dubious ownership trade history
Among the dozens of presidents that have preceded Trump in the Oval Office, none can declare they’ve inherited a pricier ownership trade.
The most ordinary way to assess “worth” on Wall Street is with the worth-to-returns (P/E) ratio. The P/E ratio is arrived at by dividing a business’s distribute worth into its trailing-12-month returns per distribute (EPS), with a lower P/E ratio typically signifying a better worth.
Though the P/E ratio is a fantastic tool for quickly assessing the relative cheapness or priciness of a mature business, it can be easily tripped up by short-term shock events that disrupt corporate returns. For example, lockdowns during the COVID-19 pandemic in 2020 made trailing-12-month EPS relatively useless for a number of companies.
This is where the S&P 500’s Shiller P/E Ratio comes into play. You’ll commonly discover the Shiller P/E Ratio also referred to as the cyclically adjusted P/E Ratio (CAPE Ratio).
S&P 500 Shiller CAPE Ratio data by YCharts.
The Shiller P/E is based on average worth rise-adjusted EPS over the prior 10 years. Using a decade of worth rise-adjusted returns history means that shock events can’t skew this assessment metric. In other words, it provides as close to an apples-to-apples assessment assess as feasible when back-tested more than 150 years.
As of the closing bell on Jan. 17, the S&P 500’s Shiller P/E sat at 38.11. This marks the highest reading for an incoming president dating back to January 1871 (i.e., as far back as the Shiller P/E can be back-tested). For context, the average Shiller P/E over the last 154 years is 17.19.
What’s particularly concerning is what’s happened during previous instances where ownership valuations became extended to the upside.
Since 1871, there have only been six instances where the Shiller P/E has surpassed 30 during a bull trade, including the now. Following the prior five occurrences, the Dow Jones, S&P 500 and/or Nasdaq Composite all shed 20% to 89% of their worth. Although the timing of these peak-to-trough downturns has been unpredictable, the crystal-obvious takeaway is that additional expense valuations aren’t sustainable.
Even with most of President Donald Trump’s policies viewed as favorable to corporate America, inheriting one of the priciest ownership markets in history might pave the way for a bear trade or short-lived crash during his second term.
history offers a silver lining for investors, too
Based solely on what history tells us, additional expense valuations for stocks aren’t sustainable over very long periods. Eventually, the ownership trade is going to enter a period of correction and the Shiller P/E will retrace from one of its highest readings in history.
But it’s not all impoverished information for investors — it just depends on your resource period frame.
In June 2023, the researchers at Bespoke resource throng published a data set on social media platform X that compared the calendar-day length of every bear and bull trade for the S&P 500 dating back to the commence of the Great Depression in September 1929.
As you can in the post below, there were 27 divide bear and bull markets spanning 94 years. Whereas the typical bear trade stuck around for only 286 calendar days, the average bull trade endured for 1,011 calendar days, which is about 3.5 times as long.
This isn’t the only evidence that suggests widening your resource lens and playing the long game is a winning way.
Every year, Crestmont Research refreshes a published data set that calculates the 20-year rolling total returns (including dividends paid) for the S&P 500 dating back to 1900. Despite the S&P not coming into existence until 1923, Crestmont was able to track the act of its components in other indexes from 1900 to 1923 to gather back-tested total profitability data.
Out of 105 rolling 20-year periods examined, with complete years of 1919 through 2023, all 105 generated positive total returns. No matter what challenges Wall Street contended with, hypothetically buying and holding an S&P 500 tracking index for 20 years has been a profitable resource 100% of the period since the commence of the 20th century.
What’s more, investor returns were often sizable. Approximately 90% of these rolling 20-year periods generated an average annual total profitability of 6% or greater, while nearly half of all ending years produced annualized returns of at least 9%.
President Donald Trump making ownership trade history may serve as an ominous short-term warning for investors, but the long-term upward trajectory for equities remains firmly intact.
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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