The stock market faces uncertainty as President Donald Trump prepares to take office for his second term in 2025. During his first term, the Dow Jones, S&P 500, and Nasdaq Composite soared by 57%, 70%, and 142%, respectively. Trump’s efforts to lower corporate income tax rates and deregulation helped fuel the bull market rally.
However, Trump will be inheriting a historically pricey stock market. The Shiller P/E ratio, a key valuation measure, stood at 37.58 as of Jan. 8, 2025.
Whenever this ratio has topped 30 in the past, it has been followed by market declines ranging from 20% to 89%. Another historical trend to consider is the correlation between Republican presidencies and recessions. Since 1913, all ten Republican presidents have experienced recessions during their tenure, including Trump’s short but sharp recession at the onset of the COVID-19 pandemic.
Despite these concerns, history also provides reasons for long-term optimism. Bull markets tend to last significantly longer than bear markets, with the typical bear market lasting roughly 9.5 months and bull markets sticking around for an average of 1,011 calendar days. Over a 20-year horizon, the likelihood of making money in the stock market has historically been very high.
Crestmont Research’s analysis of rolling 20-year periods for the S&P 500 indicates that investors generally saw positive returns over the long term, with many periods generating average annual total returns of 9% or higher.
Trump’s second term market concerns
As Trump takes office, investors and money managers will closely watch which of his promises turn into policy and the subsequent effects on the market.
Taxes, tariffs, deregulation, and the national deficit are top of mind for Wall Street. Some experts anticipate a slew of executive orders right from the start. With a narrow Republican majority in Congress, large portions of the Tax Cuts and Jobs Act, which is approaching expiration at the end of 2025, will likely be extended.
Tariffs can be levied through executive order, and a Republican Congress is unlikely to push back. The economic impact of these policies will vary depending on whether they are blanket tariffs or targeted tariffs on certain countries. Wall Street also anticipates a wave of deregulation that will boost multiple parts of the economy.
A new FTC chair could usher in a new era for Big Tech, potentially reviving the M&A environment. The national debt, hovering around $36 trillion, is another concern. Trump will likely focus on balancing the budget through measures that might include targeted spending cuts.
Contrarian investor Brett Owens sees the current market fear as an opportunity, believing that lucrative bargains can be found in dividend stocks. He emphasizes that when emotions run scared, smart investors should pounce on these bargains. While the next four years promise significant market shifts, opportunities abound for the discerning investor.
By focusing on undervalued dividend stocks and being selective about investments in sectors like healthcare and energy, retirement fortunes might be made or lost based on strategic decisions taken today.
