The article discusses historical trends and valuation metrics that suggest potential stock market volatility, specifically referencing a hypothetical second term for President Donald Trump and the year 2026.
Stock Market Performance Overview
During President Donald Trump's first term, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite increased by 57%, 70%, and 142%, respectively. In the first 11 months of a hypothetical second term (through December 29), these indexes rallied 14%, 17%, and 22% year-to-date.
Historical Valuation as a Factor
The S&P 500's Shiller Price-to-Earnings (P/E) Ratio, or cyclically adjusted P/E (CAPE Ratio), reached 40.59 on December 29. This valuation is the second highest recorded since January 1871, surpassed only by the 44.19 peak prior to the dot-com bubble burst. The historical average for the Shiller P/E is approximately 17.3.
Historically, when the Shiller P/E has exceeded 30 (which has occurred six times including the present), subsequent market declines have ranged from 20% to 89% in the Dow Jones Industrial Average, S&P 500, or Nasdaq Composite. For example, following the dot-com bubble, the S&P 500 and Nasdaq experienced declines of 49% and 78%, respectively. While the Shiller P/E does not predict specific timing for market corrections, it has historically preceded periods of significant market downside.
This elevated historical valuation suggests an increased potential for stock market volatility in 2026.
Additional Historical Precedents
Several historical correlations suggest 2026 could be a challenging year for equities:
- Midterm Election Years: Data from Carson Group's Chief Market Strategist Ryan Detrick indicates that since 1950, the S&P 500 has experienced its largest average peak-to-trough drawdown (17.5%) during midterm election years compared to other years of a presidential term. Midterm years typically see market lows later in the year, followed by average gains exceeding 30% a year later.
- Presidential Terms and Recessions: Since 1913, all 10 Republican presidents have overseen the onset of a recession during their terms, including President Trump during his first term. In contrast, four of the nine Democratic presidents during the same period did not have a recession begin during their time in office. This historical pattern suggests a potential for recession during a Republican presidency, though it does not guarantee it.
- Tariff Policies: A December 2024 report by New York Federal Reserve economists, published in Liberty Street Economics, examined the impact of Trump's 2018 and 2019 China tariffs. The report found that public companies directly affected by these tariffs experienced declines in employment, labor productivity, sales, and profits from 2019 to 2021. This suggests that similar trade policies could contribute to market weakness.
These historical correlations, while not guarantees, indicate a potentially higher risk of stock market volatility in 2026.
Long-Term Market Perspective
Historically, stock market downturns are part of market cycles. Data from Bespoke Investment Group, covering S&P 500 bull and bear markets since September 1929, shows that bear markets have averaged 286 calendar days (approximately 9.5 months), while bull markets have persisted for an average of 1,011 calendar days (about 3.5 times longer).
Furthermore, Crestmont Research data on rolling 20-year total returns for the S&P 500, including dividends, from 1900 to 2024, indicates that all 106 examined 20-year periods yielded a positive annualized total return. This suggests that long-term investments in the S&P 500 have historically been profitable over two-decade spans, irrespective of presidential terms.