History clearly shows what will happen if Donald Trump wins in November and Republicans take control of Congress.
It’s that time of year again. I’m not talking about tax season. With many presidential primaries in the rearview mirror, America’s attention is focused on the November election.
Although there are many aspects of politics that do not intersect with what is happening on Wall Street, the fiscal policy changes drafted by Congress and signed into law by the President of the United States have a significant impact on corporate profits and the trajectory of economic growth. may give. .
As of this writing on April 17, former President Trump has received 1,863 delegates, far exceeding the 1,215 needed to win the Republican presidential nomination. During Trump’s presidency, which began with his oath of office on January 20, 2017, the symbolic Dow Jones Industrial Average (^DJI 0.56%)standard S&P500 (^GSPC -0.88%)and innovation-driven Nasdaq Composite (^IXIC -2.05%) They jumped to 57%, 70%, and 142%, respectively.
During President Trump’s Oval Office, he worked with a unified Republican-controlled Congress for the first two years and a divided Congress for the last two years (Democrats controlled the House from January 3, 2019 until January March 2021).
Former President Donald Trump on a conference call. Image Source: Official White House Photo by Shealah Craighead.
The question is: Will Donald Trump winning a second term as president, coupled with Republicans controlling the House and Senate, prepare stocks for a major crash? Let’s take a closer look at the challenges a unified Republican Congress and President Trump’s administration will face, and let history be the deciding factor.
If Trump wins in November and Republicans take control of Congress, will stock prices plummet?
A unified Republican Congress with Donald Trump as president will be faced with two challenges. The first is based on policies that may be passed by the Trump administration. The second group of headwinds, on the other hand, are rooted in the economy and can occur regardless of who wins the presidency or controls Congress.
With a Republican-controlled Congress and President Trump in power, there are two potential problems for Wall Street and investors. First, Republicans could seek to pass tax reform that would lower corporate and personal income tax rates. People and businesses want to earn additional disposable income, but America’s debt levels are increasing at an alarming pace. The tax cuts would not only increase the federal government’s annual interest expenses, they could also worsen Congress’ already unsightly annual budget deficit.
A second potential policy concern with President Trump in power and Republicans in control of Congress is the possibility of new tariffs on Chinese goods. In February, President Trump said on Fox News’ “Sunday Morning Futures” that if re-elected, he would impose tariffs of more than 60% on Chinese goods. Tariffs imposed on Chinese goods during his first term resulted in higher prices being passed on to American consumers. Relations between the United States and the world’s second-largest economy have also deteriorated.
But the bigger threat to the U.S. economy and stocks may be macroeconomic headwinds that have nothing to do with who wins the presidency or which party controls Congress.
Warning: Money Supply is officially in contract. 📉
This has only happened four times in the last 150 years.
Each time was followed by a Great Depression with double-digit unemployment rates. 😬 pic.twitter.com/j3FE532oac
— Nick Gurli (@nickgerli1) March 8, 2023
Perhaps the most salient concern at the moment is the significant decline in US M2 money supply since March 2022. M2 money supply takes into account everything in M1 (cash, coins, and demand deposits in checking accounts) and adds money market accounts, savings accounts, and certificates of deposit (CDs) under $100,000.
Most economists and investors pay little attention to the U.S. money supply because it has been steadily increasing for about 90 years. However, after registering a historic expansion of 26% (year-on-year) during the COVID-19 pandemic, M2 has fallen by nearly 4.3% in total since March 2022. This is the first significant drop in M2 since the Great Depression.
As you can see in the above post by Reventure Consulting CEO Nick Gerli on there is no. -Year-on-year basis. The four previous instances in which such declines occurred (1878, 1893, 1921, and 1931-1933) were correlated with deflationary recessions and high unemployment rates.
If there’s a silver lining here, it’s that the Fed and the federal government now know far more about how to avoid recessions than they did a century ago. Despite this knowledge, a decrease in the M2 money supply suggests that consumers will be forced to cut spending. This has historically been a factor in recessions, and stock prices typically underperform during recessions.
S&P 500 Shiller CAPE Ratio data by YCharts.
Another major concern on Wall Street that won’t go away no matter who wins in November is high stock valuations. Specifically, the S&P 500’s Shiller price-to-earnings ratio (P/E), also known as the cyclically adjusted price-to-earnings ratio (CAPE ratio), suggests that major stock indexes are likely to crash. Masu.
As of April 17th’s close, the S&P 500 Shiller P/E was 33.34 times. This is the sixth time in history that the Shiller P/E ratio has exceeded 30 during a bull market rally, except that it is almost double the average value of 17.11 backtested to 1871. Following the previous five instances, the S&P 500 endured declines ranging from 20% to 89%.
To be clear, the Shiller S&P 500 is not a timing tool. Stock prices can remain high for years before falling. However, it provides compelling evidence to magnify stock valuations. Finally (Keyword!) Dragging the Dow Jones, S&P 500, and Nasdaq Composite into a bear market.
These macro catalysts absolutely have the potential to cause a stock market crash.
Image source: Getty Images.
As history says, what happens when Republicans control the president and Congress?
Now that we have a good look at the challenges that Donald Trump and a Republican-controlled Congress may face, let’s move on to the good news. Historically, the stock market wins no matter which party wins in November.
According to a study conducted by independent financial intelligence firm CFRA Research, from 1945 to 2021 there was a total of eight years of Republican-controlled unified government. During these eight years of Republican control, the benchmark S&P 500 averaged 12.9. % return. That’s actually better than the S&P 500’s average annual return of 10.5% during 23 years of unified Democratic control.
Another report by Retirement Researcher found similar results. The retired researcher studied his S&P 500 annualized returns (when backtested) from 1926 to 2023. For nearly a century, a unified Republican Congress with a Republican president was held in his 13 of those years, leading to average annual returns. 14.52%.
No matter how the pieces of the political puzzle move, the S&P 500 has consistently produced positive annual returns over the long term.
^SPX data by YCharts.
The reason the stock market is such a true wealth creator for patient investors is because the U.S. economy has expanded steadily over time.
Despite warnings about a possible recession, the US economic downturn will not last long, as M2 falls for the first time since the Great Depression. Of the 12 official recessions in the United States since World War II, nine lasted less than a year, and the remaining three lasted no longer than 18 months. By comparison, most economic expansions lasted multiple years, and the two growth periods after 1945 lasted more than a decade.
The stock market and the U.S. economy don’t move in tandem, but what’s good for the goose is often good for the goose. If the U.S. economy is expanding, corporate profits are also likely to expand. Stock valuations increase over time due to increases in corporate earnings.
And it’s not just U.S. economic growth that lasts disproportionately longer than recessions. Wall Street bull markets also last much longer than bear markets.
It’s official. A new bull market has been confirmed.
The S&P 500 is currently up 20% from its October 12, 2022 closing low. During the last bear market, the index fell 25.4% in 282 days.
For more information, please visit https://t.co/H4p1RcpfIn. pic.twitter.com/tnRz1wdonp
— Bespoke (@bespokeinvest) June 8, 2023
In June 2023, Bespoke Investment Group researchers analyzed every bear market and bull market in the S&P 500 dating back to the beginning of the Great Depression in September 1929. Meanwhile, the 27 S&P 500 bear markets took an average of 286 calendar days to resolve (about 9.5 months), while a typical bull market lasted 1,011 calendar days, or 3.5 times longer.
What’s more, the S&P 500’s 13 bull markets have lasted longer than its longest bear market.
History clearly shows that investors with patience and vision are well-positioned to grow their wealth if Donald Trump wins in November and Republicans take control of both houses of Congress.
