Will Trump's Return See the Bull Market End?

As Published in The Wealth Effect Newsletter - January 16, 2025

As the confetti settled on 2024, Wall Street celebrated a triumphant year. The Dow Jones, S&P 500, and Nasdaq Composite posted stellar annual gains of 13%, 23%, and 29%, respectively. Drivers of this roaring bull market included AI mania, stock-split excitement, and record-smashing earnings.

But with Donald Trump returning to the Oval Office on January 20, 2025, investors are stepping into uncharted—and expensive—territory. The critical question now is: Will this bull market continue its momentum, or are we facing an imminent crash?

The Numbers Speak Volumes

The market's current valuation metrics paint a cautionary picture. The Shiller P/E ratio, which averages earnings over 10 years to minimize short-term noise, sits at an eye-popping 37.58. For context, the historical average is 17.19. This makes today's market the third most expensive in history, exceeded only by the dot-com bubble and the prelude to the 1929 crash.

When the Shiller P/E has crossed 30 in the past, the outcome has often been severe. Historically, these moments have been followed by market downturns of 20%, 50%, or even 89%.

Adding to the concerns, the Buffett Indicator—a market cap-to-GDP ratio Warren Buffett considers “the best single measure of valuations”—hit 209% in December 2024, marking an all-time high. For comparison, its historical norm is 85%. When valuation metrics scream overvaluation, history shows that corrections often follow.

Trump’s Presidency: A Historical Perspective

Every Republican president since 1913 has faced a recession during their tenure, and Trump is no exception—having encountered one in 2020. The economic setup for 2025 doesn’t inspire much confidence either. The M2 money supply, a measure of cash and liquidity in the economy, has seen its sharpest contraction in decades. This signals less money flowing through the system and sets the stage for potential economic turbulence.

Recessions, while not guaranteed market death sentences, have historically led to two-thirds of the S&P 500’s largest drawdowns. A potential recession under Trump’s leadership could bring significant market volatility.

What’s an Investor to Do?

The good news is that history favors patient, disciplined investors. Bull markets tend to last longer and generate greater rewards than bear markets. On average, bear markets last just nine months, while bull markets stretch nearly three years.

Here are strategies to consider:

1. Focus on Fundamentals: Invest in high-quality companies with robust earnings and balance sheets.
2. Diversify: Spread risk across asset classes, sectors, and geographies.
3. Hold Cash: A down market is a discount market. Be prepared to seize opportunities as they arise.

Looking Ahead

As Trump steps back into office, the market is navigating a precarious balance between historic overvaluation and the promise of long-term resilience. This isn’t the time to panic; it’s the time to strategize. Volatility creates opportunities for those who are ready to act.

As we step into 2025, remember: staying patient and disciplined is the key to thriving in turbulent markets. Let’s make this year count.

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This blog post is based on “The Wealth Effect” newsletter article titled “Will Trump's Return See the Bull Market End?” originally published on January 16, 2025.