The S&P 500 performed extremely well during Donald Trump’s last presidency, but the future will be bright for investors no matter who wins the election.
There are only six months left until the 2024 presidential election. Neither party has officially selected a candidate and will not do so until national conventions are held this summer. However, Donald Trump and Joe Biden have secured enough delegates to win the nomination.
To that point, history speaks for itself. S&P500 (^GSPC 1.26%) Stocks could rise if Donald Trump is elected president in November. However, before we discuss the historical performance of the stock market, we want to clarify something. The stock market and the economy are influenced to varying degrees by presidential policies and appointments, but neither is controlled by a single individual.
To that end, it would be a mistake to invest (or not invest) just because a particular party controls the White House.analyst of goldman sachs I recently shared the following insight:
Regardless of who the next president becomes, we support the view that stock prices will continue to be driven by macro fundamentals. Investing in the S&P 500 only during Republican or Democratic presidential years since 1953 would have resulted in a significant shortfall compared to investing in the index regardless of the party in power.
With that in mind, let’s take a look at what happened the last time Donald Trump was president.
History says the stock market could soar during President Donald Trump’s term
The S&P 500 is the most popular benchmark for the entire U.S. stock market. The index tracks 500 large U.S. companies in all 11 market sectors, covering more than 80% of domestic stocks by market capitalization. Although its predecessor index was developed in his 1920s, the S&P 500 itself was not introduced until his March 1957.
With that in mind, the chart below details the annual return of the S&P 500, also known as the compound annual growth rate (CAGR), for each presidential term since March 1957. In most cases, his presidential term began and ended in mid-January. Years are listed, but there are exceptions. For example, Gerald Ford became president in August 1974 after Richard Nixon resigned.
The S&P 500 was created in March 1957. The graph above shows the index’s annual return for each presidential term since its inception.
As shown above, during the four years that Donald Trump was last president, the S&P 500 returned 14.1% annually. That’s higher than the 8.7% annual return under President Joe Biden. Of course, this comparison isn’t entirely fair because Biden hasn’t finished his term yet. But to make up the difference, the S&P 500 would need to rise 28% by mid-January (the end of Biden’s first term).
Interestingly, the S&P 500 index performed better under Donald Trump than any other Republican president in history. In fact, only one Democrat, Bill Clinton, served as president during an era when the stock market delivered greater annual returns.
It’s also worth noting that both political parties could claim that the S&P 500 has historically performed better under their leadership, and both parties would be correct. For example, the S&P 500’s average CAGR of 6% during Republican presidents is lower than its average CAGR of 9.5% under Democratic presidents. Conversely, the median CAGR of 10.2% under Republican presidents is higher than the median CAGR of 8.2% under Democratic presidents.
Past results are no guarantee of future performance
The last time Donald Trump was president, the S&P 500 performed extremely well. But that doesn’t mean President Donald Trump will have the same (or similar) results if he takes office again. As an example, during President Ronald Reagan’s first term, the S&P 500 returned 6.8% annually, while the index returned 13.7% annually during his second term.
Moreover, today’s macroeconomic environment is vastly different than it was when Donald Trump was last president. Inflation has risen and the Federal Reserve has raised its benchmark interest rate to its highest level in decades. This means that interest rates on mortgages, loans, and credit cards are much higher today. These factors affect personal consumption and business investment, and have a significant impact on corporate profits and stock markets.
The conclusion is: Statistics can be manipulated. Both Republicans and Democrats can claim that the S&P 500 index performed better during their presidential years, and they can back up their claims with hard facts. Therefore, investors should ignore such comments. Furthermore, while the stock market soared the last time Donald Trump was president, the same outcome is not guaranteed if he is elected president again.
Finally, investors should not predict returns based on which party controls the White House. Rather, as Goldman Sachs analysts suggest, the macroeconomic environment is the more important variable. Ultimately, investors should expect his S&P 500 index to revert to its mean value over an extended period of time. This means that the index is likely to return approximately 10% annually if its performance is measured over a multi-decade period.
