Trade Agreement Pause Terminates in Eleven Days - Could a Stock Market Downturn Initiated by Trump be imminent?
In early April 2025, the stock market experienced significant gyrations, a direct result of President Donald Trump's tariff announcements on the 2nd. Following the close of trading on this day, Trump announced a 10% sweeping global tariff and higher "reciprocal tariff" rates on dozens of countries, precipitating a cumulative 10.5% drop over two sessions in the S&P 500.
This turbulent period, however, was followed by a 90-day pause, during which President Trump implemented a hold on these higher reciprocal tariff rates for all countries except China. On April 9, this pause led to the respective largest single-day point gains in the history of the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite.
The Shiller P/E, a cyclically adjusted price-to-earnings ratio, nearly touched a multiple of 39 before Trump's inauguration, making it the third-highest reading since January 1871. Being optimistic and allowing time to work in your favour has historically been a moneymaking decision in the stock market. However, when the Shiller CAPE Ratio surpasses and sustains above 30 for at least two months, historical records show that this has been an extremely rare event—occurring only six times in the past 154 years as of mid-2025.
Excluding the current episode, the five prior instances were followed by significant market declines, ranging from 20% to 89% in subsequent periods. With the CAPE ratio currently at elevated levels (around 36 as of June 2025), historical patterns suggest that the market’s forward return expectation is low—typically in the range of just 2.3% to 2.4% annualized over the next 10 years, including dividends, which is far below the long-term historical average of about 9.2% since 1950.
The typical S&P 500 bull market has lasted for 1,011 calendar days, or roughly two years and nine months. If extrapolated from June 2023 to present day, more than half (14 out of 27) of all S&P 500 bull markets since the Great Depression have lasted longer than the longest bear market. None of these 27 bear markets extended beyond 630 calendar days, with the average length being 286 calendar days, which is around 9.5 months.
In the first half of 2025, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite hit respective all-time highs. It's important to note that historical precedent suggests that tariffs can have adverse effects on businesses, including falling profits, employment, sales, and labor productivity.
Over multiple decades, stocks have delivered a higher average annual return to investors than any other asset class. Despite this, it's crucial for investors to consider the current circumstances and potential risks when making investment decisions. The Shiller CAPE Ratio, as a tool for assessing market valuation, can provide valuable insights into these risks and potential returns.
Sources: [1] Bespoke Investment Group, June 2025 [2] Robert Shiller, 2018 [3] Jeremy Siegel, 2023 [4] Federal Reserve Bank of St. Louis, accessed June 2025
- The turbulent stock market gyrations in early April 2025, triggered by President Donald Trump's tariff announcements, highlighted the interconnection between finance, business, and politics.
- As the Shiller P/E ratio approached a multiple of 36 in June 2025, many investors might find historical patterns concerning, given that such levels have typically signaled low market returns over the next 10 years.
- Despite stocks historically delivering higher average returns to investors than other asset classes, it is essential to consider current situations and potential risks before making investing decisions, even in periods of general-news highs like the first half of 2025.
- When evaluating investment opportunities, analysts may find it beneficial to examine tools like the Shiller CAPE Ratio to assess market valuation and understand the associated risks and potential returns.
