In a notable development for U.S. financial markets, the S&P 500 index achieved a milestone in August, becoming the first such milestone under a second-term president since 1950. This achievement is particularly significant as all six previous second-term presidents faced declines in the S&P 500 during August of their post-election year.
For over a century, the stock market has been a primary avenue for wealth accumulation, outpacing returns from other asset classes. However, it is also notorious for its volatility, characterized by corrections, bear markets, and occasional crashes, with earlier this year marking a sharp decline for major indices. The S&P 500 recorded its fifth steepest two-day percentage drop since 1950, closely followed by steep declines in the Dow Jones Industrial Average and the Nasdaq Composite.
President Donald Trump has been a pivotal figure in this backdrop of volatility, influencing market movements with his economic policies. Recent weeks have seen the S&P 500, Dow, and Nasdaq surge to impressive closing highs, amidst investor optimism fueled by potential interest rate cuts from the Federal Reserve. Lower interest rates are anticipated to stimulate corporate borrowing, potentially driving hiring, innovation, and an increase in mergers and acquisitions.
Furthermore, the market has been buoyed by fervent interest in artificial intelligence (AI), with predictions stating that AI could add approximately $15.7 trillion to global GDP by 2030. This wave of excitement has been particularly pronounced among leading tech firms, widely referred to as the “Magnificent Seven,” who are investing significantly in AI infrastructure.
Trump’s trade policies, especially regarding tariffs, were viewed as a considerable source of previous uncertainty. In August, the S&P 500 rising by 1.9% marked a historic break from the past, as previous second-term presidents had not experienced such growth during that month.
Despite the newfound bullish sentiment, analysts caution against complacency. The stock market is currently facing two significant challenges: elevated valuations and uncertainty surrounding the long-term effects of Trump’s tariff policies. The S&P 500’s Shiller price-to-earnings (P/E) ratio recently surpassed 39, far exceeding its historical average of 17.28. Historical data suggests that this level of valuation could often precede substantial market corrections.
Moreover, the potential repercussions of Trump’s tariffs on inflation are still unfolding. Researchers have pointed to past trade policies, indicating that these tariffs not only affect finished goods but can also increase the costs of domestic production components. This could exacerbate inflation concerns, particularly in a job market that has shown signs of strain in recent months, raising fears of a possible stagflation scenario.
Despite current uncertainties and market volatility, historical data provides a strong case for long-term investors. Research by Crestmont found that all rolling 20-year periods of the S&P 500 yielded positive annualized returns, suggesting resilience in the face of economic fluctuations. Furthermore, data from Bespoke Investment Group highlights that bull markets typically outlast bear markets significantly, reinforcing bullish long-term expectations for U.S. stocks and the economy.
In summary, while recent market performance may signify a break in trends associated with second-term presidencies, the road ahead is fraught with challenges that warrant cautious optimism among investors.
