What Does History Say About Market Crashes During Presidential Terms?

As Donald Trump steps into office, he inherits a stock market that’s among the most expensive in history. With soaring valuations and uncertainties around economic policies, many are wondering if a market crash is on the horizon. Let’s break this down in simple terms, using history and data to explore what could happen next.

What Happened After the Election?

November was a busy time on Wall Street. Besides key earnings reports and economic updates, the U.S. presidential election stole the spotlight. Shortly after the results were announced, Donald Trump was confirmed as the president-elect. The stock market reacted with a surge, continuing a bull run that started long before the election.

During Trump’s first term, the Dow Jones Industrial Average, the SPX500 (a popular index tracking the S&P 500), and Nasdaq Composite climbed by 57%, 70%, and 142%, respectively. But as we often hear, “Past performance is no guarantee of future results.” Now, with stock indexes at record highs, investors are questioning whether this rally is sustainable or if a downturn is looming.

Could Economic Policies Shake Things Up?

A lot depends on the policies Trump puts in place. Two key areas that could impact the economy and markets are tariffs and national debt.

Trump has floated the idea of high tariffs—25% on imports from Canada and Mexico and 35% on goods from China. While tariffs aim to protect local industries and encourage domestic manufacturing, they can also increase costs for businesses and consumers. This might lead to rising prices, which economists call inflation. If inflation grows too quickly, it could slow economic growth, creating challenges for the Federal Reserve as it manages interest rates.

On the debt side, the U.S. government has consistently spent more than it earns. While Trump’s tax cuts might spur economic activity, they could also increase the federal deficit, adding to long-term financial pressures.

What Does History Say About a Market Crash?

History doesn’t repeat itself exactly, but it often gives us clues. Let’s look at some data-backed indicators that have signaled market risks in the past.

1. Valuation Metrics Are Flashing Red
   One popular measure, the Shiller price-to-earnings (P/E) ratio, shows the stock market is highly valued. As of December, this ratio stood at 38.89, more than double its historical average of 17.17. The last two times the ratio was this high—during the dot-com bubble in 1999 and in late 2021—major stock indexes saw significant drops. After the dot-com bubble burst, for example, the Nasdaq lost nearly 78% of its value.
2. The Buffett Indicator Is at Record Levels
   Another important measure, the Buffett Indicator, compares the total value of the stock market to the size of the U.S. economy (GDP). Historically, this ratio averages around 85%. Recently, it surpassed 200%, suggesting the market may be overvalued. When this indicator hits such levels, a market correction often follows.

Why Patience Can Pay Off

While these warning signs suggest a potential correction, history also teaches us that market downturns don’t last forever. Bear markets—periods when stocks fall significantly—are typically short-lived, averaging about nine months. In contrast, bull markets—long periods of growth—last over three years on average.

Data from 1926 to 2023 shows that the stock market has historically performed well under unified Republican control, delivering an average annual return of 14.52%. However, even during periods of divided government or under Democratic leadership, the market has generally risen over time. This underscores the importance of focusing on the long term rather than reacting to short-term market swings.

What Should Investors Keep in Mind?

While no one can predict the future, history suggests that short-term corrections can often be opportunities for those with a long-term perspective. Market cycles, influenced by factors like valuations, policies, and economic growth, are a natural part of investing. By staying informed and focusing on broader trends, it’s possible to weather such periods of uncertainty effectively.