What Duration Can We Expect for the Stock Market's "Trump Effect" According to Historical Data?
The S&P 500 (^GSPC -1.11%) has had a substantial rise since Donald Trump secured the presidential victory on Nov. 5, 2024. Despite a brief pullback after the Federal Reserve suggested fewer rate cuts than anticipated, the index is now regaining momentum, hovering around 1% below its all-time high.
What's the duration of the "Trump effect" on the stock market? Let's explore historical trends.
Presidential ups and downs
Following a newly elected U.S. president, how usually does the stock market behave, and how long does positive growth persist throughout the new presidency? A consistent pattern doesn't exist.
Since 1960, ten new U.S. presidents have ascended to office. I didn't include Lyndon B. Johnson, who stepped into the role after John F. Kennedy's assassination before winning the presidency in 1964. The S&P 500 rose in just half of these instances.
After JFK's election in 1960, the stock market yielded a remarkable 8.7% gain by his inauguration on Jan. 20, 1961. The market continued to thrive during the first year of his presidency until it plunged in 1962.
The S&P 500 showed no growth following Richard Nixon's and Jimmy Carter's elections in 1968 and 1976, respectively. Reagan's election in 1980 saw a minor rise in the S&P, but the market began a steep sell-off during the first year of his presidency.
George H.W. Bush inherited a robust economy and stock market from Reagan. However, the S&P 500 experienced a notable decline in October 1989 under Bush's tenure.
Bill Clinton's first election in 1992 resulted in a mild rise in the stock market. This momentum continued for an extended period, with the S&P 500 not experiencing a decline of 10% or more until 1997.
When George W. Bush took office in 2000, the bull market concluded. The stock market dropped following his election as the dot-com bubble burst. Barack Obama's 2008 election also coincided with a substantial negative shift in the S&P 500, with stocks plummeting nearly 20% between Election Day and his inauguration.
The first "Trump boom" took effect in 2016, with the index ascending almost 6% ahead of his inauguration. This bull market persisted until the second half of 2018, when stocks experienced a significant decline. However, by mid-2019, the losses had been recouped, with the S&P 500 resuming its uptrend until the pandemic caused a significant slump.
Joe Biden saw the largest presidential gain, with the S&P 500 surging 14% between his election and inauguration. The market continued its winning streak during the first year of Biden's presidency but faltered in 2022.
Lessons from the past
What can we derive from the history of presidential boosts? Not many clear-cut lessons. Over the past seven decades, the chances of the S&P 500 rising post-election are equal to the likelihood of it declining.
In three out of five instances when the market rose between Election Day and inauguration day, the momentum failed to endure. During just one period (under Bill Clinton's presidency) did a bull market persist into the second presidential term.
One of the most crucial lessons from history is that it offers little predictive power regarding the stock market's performance during a new presidency. Macroeconomic factors have fluctuated so significantly in the past that no clear historical pattern for stocks can be discerned.
Looking forward
A survey conducted by CNBC revealed that most investors believe the stock market will prosper under a second Trump term. However, this optimistic sentiment might stem from nostalgia about the S&P 500's gains during much of Trump's first four years in office.
It's essential to note that interest rates are higher as Trump prepares to take office again than during his initial term. Additionally, Trump appears to be more enthusiastic about imposing hefty tariffs across the board than he was eight years ago. Many economists believe these tariffs could negatively impact the U.S. economy, potentially leading to stock market declines.
Investors should consider a longer-term perspective than a single presidential term, irrespective of who assumes the Oval Office. The stock market's performance in the long term, despite fluctuating short-term trends, remains consistent in delivering solid returns. A longer investment period generally enhances the chances of success.
The discussion about the stock market's performance during presidential terms leads us to consider the role of finance and investing. Investors might be interested to know if President Trump's proposed policies, such as higher interest rates and tariffs, could impact their investment strategies in his second term.
Investing in the stock market requires a strategic approach that takes into account various factors, including political changes. Whether or not a president is known for financial policies favorable to investors, maintaining a diverse portfolio and a long-term perspective can help mitigate risk and potentially yield positive returns.
