This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
People love to connect the performance of the economy to whomever the President of the United States is -- perhaps even more so with the stock market.
With the barrage of investors parking their wealth in index funds and other investments tied to the performance of United States stocks, people feel better when the market is doing better. When it is down, they typically try and find a scapegoat.
Some people -- regardless of whether blame should be assigned to them or not -- will look at the president and ask if they are responsible for stock market declines. I am here to tell you that this thinking is misguided.
Donald Trump just returned as President of the United States. Many of you are likely asking what this means for the stock market. How likely is it that the stock market will crash under President Trump? Here's what history says could happen, but also why that may be the wrong question to ask in the first place.
Trump's first administration returns were volatile but strong
To look at what could happen in the second Trump administration, let's look at what happened in the first one. The S&P 500 Index (SP: .INX) posted an 83% cumulative return from 2017-2020, with one drawdown of around 15% in 2018 and a 35% drawdown in early 2020. Data like this shouldn't surprise readers, as it is in line with the historical averages for stock market returns.
Over the long term, the stock market tends to go up along with the earnings of US-listed companies. However, there are always drops along the way.
Were these two stock market corrections caused by President Trump? In late 2018, investors were worried about the Federal Reserve hiking interest rates and what that meant for share prices. During that period, the S&P 500 traded at an elevated average price-to-earnings ratio (P/E) versus the historical average. In 2020, we had the COVID-19 pandemic that caused the crash, which was outside the presidential administration's control.
That is the nature of free markets, with minimal top-down control. In fact, if one wanted to assign responsibility for the rapid stock market recovery in 2020, you might give that to Congress and the Fed for lowering interest rates and giving checks to United States citizens to stimulate the economy.
SPY Total Return Level data by YCharts.
Prior stock market crashes tell the story (but not in the way you think)
Starting with the Great Depression around 100 years ago, there have been 10 stock market crashes where the S&P 500 prices fell by 20% or more. That is around one every 10 years, although not in exact 10-year increments. Investors need to come to grips with this uncertainty and risk. Without risk, there is no reason you should earn returns in the market above the rate of inflation.
Using this argument as a baseline, we can say there is a 1-in-10 chance that the stock market crashes under President Trump. There is another factor we can consider when looking at the market in 2025, though.
What is the true likelihood of a stock market crash under President Trump?
In a vacuum, there is approximately a 10% chance that the stock market will crash 20% each year. This doesn't take into account starting prices for stocks, which we should consider when looking at stocks in 2025. The average P/E for the S&P 500 is 30, which is close to an all-time high. This makes it much more likely (although still not a guarantee) that stock prices will fall in 2025.
Should they revert to the typical long-term average near 20, this alone would constitute a correction of over 20%.0 We just saw the largest company in the world, Nvidia, kick the year off with a sharp crash on disruption fears. Anything can happen in a 12-month period.
Notice how I haven't said anything about a United States president causing a stock market crash? The president has minimal-to-zero control over what starting valuations stocks have when they enter office. President Trump is no different.
While a select few presidents may have hurt the stock market due to bad economic policies, this is a rare occurrence. Usually, the president has little impact on how stocks perform over the long haul, even if they might take credit for them in political speeches.
Take care to remember this if the market crashes, soars, or flatlines in 2025.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
