In just three days, Americans will head to the polls or mail in their ballots to determine which presidential nominee – current Vice President and Democratic presidential nominee Kamala Harris, or former President and Republican presidential nominee Donald Trump – will lead our great nation. The next four years.
Taking into account that all three major stock market indices are ageless Dow Jones Industrial Average (DJI: ^DJI)With a wide base Standard & Poor’s 500 (SNPINDEX: ^GSPC)Growth is driven by inventory Nasdaq Composite (NASDAQ: ^IXIC)has risen to multiple record levels in 2024, and all eyes are on this hotly contested presidential race.
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While each candidate poses unanswered questions (and it’s no secret that Wall Street doesn’t like uncertainty), A.J A potentially larger issue looms larger for stocks.
Let me begin this discussion by pointing out that campaign promises are not always implemented. If the winner on November 5 faces a divided Congress, he is unlikely to be able to implement many of the policies he proposed during the campaign.
With that said, there are proposals on both sides of the political aisle that are causing concern on Wall Street.
For example, Harris proposed addressing America’s rapidly rising national debt by raising taxes on select groups. More specifically, Harris wants to quadruple the stock repurchase tax for public companies from 1% to 4%, increase the ordinary capital gains tax from 20% to 28%, and raise the peak corporate tax rate by a third, from a historically low level to 21%. %. % to 28%.
While all of these actions would increase federal revenues, they also have the potential to negatively impact the stock market. Buybacks have been a particularly useful tool used by America’s largest publicly traded companies to reward investors and boost their shares Earnings per share (EPS). apple The company has reduced the number of its outstanding shares by more than 42% since the beginning of 2013, which has had a significant positive impact on earnings per share.
Meanwhile, Trump wants to impose tariffs on US imports as a way to encourage domestic production. According to Trump, tariffs on Chinese products imported into the United States will reach 60%, with 20% tariffs on imports from other countries.
The problem with tariffs is that they have the potential to spark a trade war, which could raise prices domestically and disrupt supply chains. Tariffs can be a mixed bag when it comes to corporate profits.
While there are undeniable question marks for Wall Street, there is much greater concern about stocks beyond Election Day.
Even with the possibility that complete election data will not be available in a few states on November 5, America will know relatively soon afterward whether Kamala Harris or Donald Trump will be the next president. Once that big question is answered, investors will turn their attention back to Wall Street’s glaring problem: its historically high valuation.
There are plenty of metrics that help investors determine whether a stock is cheap or expensive, compared to its peers and the broader market. The most popular of these tools is the price-to-earnings (P/E) ratio, which divides a company’s stock price into its trailing 12-month earnings per share.
While the traditional P/E ratio has its uses, there is another valuation tool that provides a comprehensive look at broader market valuations dating back more than 150 years. This measure is the price-to-earnings ratio of the S&P 500, also known as the cyclically adjusted price-to-earnings ratio (CAPE ratio).
Shiller’s P/E multiple is based on average inflation-adjusted EPS from the past 10 years. While the traditional P/E ratio can be affected by one-time events, such as lockdowns during the COVID-19 pandemic, Shiller’s P/E ratio does an excellent job of smoothing out these shock events to create comprehensive comparisons.
As of the closing bell on October 30, the S&P 500’s P/E stood at 37.05, more than double its all-time average of 17.17, when tested through January 1871. This also represents the third highest reading during a sustained bull market in history.
It was history To the fullest extent This was unkind to the Dow Jones, S&P 500, and Nasdaq Composite after the previous few events when the Shiller P/E exceeded 30. Including the present, a reading exceeding 30 during a bull market has only happened six times in 153 years. All five of the previous cases resulted in losses ranging from 20% to 89% for Wall Street’s major stock indexes.
The caveat with the Shiler P/E is that it is not a timing tool. Valuations can remain stretched for a few weeks, as they did before the Covid-19 crash, or for several years, as we saw before the dot-com bubble burst. However, this measure clearly shows that premium valuations are not sustainable over long periods.
Therefore, Election Day may represent an ominous turning point for Wall Street.
While selected forecasting tools and valuation metrics suggest that the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite are all headed toward a meaningful correction, history also has something positive to offer patient investors.
Every year, analysts at Crestmont Research update a published data set that calculates the 20-year total rolling returns, including dividends paid, for the broad-based Standard & Poor’s 500 index. Although the S&P did not come into existence until 1923, researchers have been able to track the performance of its components in other indices dating back to 1900. Thus, Crestmont was able to measure the total return performance of the S&P 500 over 105 periods Separate renewable 20-year term (1919-2023).
What the Crestmont Research data set shows is that all 105 periods spanning 20 years produced a positive total return. In fact, more than 50 of these periods delivered an annual return of at least 9%. In another context, if, hypothetically, you had bought the S&P 500 tracking index at any time since 1900 and held it for 20 years, you would have made money every time.
No matter who was elected president, what political party was in power, or how expensive or cheap Wall Street was viewed, patience was consistently rewarded on Wall Street.
This isn’t the only data set that underscores how much time investors can take as an ally, either.
In June 2023, analysts at Bespoke Investment Group published a data set on Depression of September 1929.
According to Bespoke’s calculations, the average bear market for the S&P 500 lasted for 286 calendar days, while the typical bull market lasted for 1,011 calendar days. To boot, 14 out of 27 bull markets have been stuck longer than the longest bear market on record for the S&P 500.
Regardless of what predictive metrics suggest could happen in the short term, time and history are still in the corner of long-minded investors.
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Sean Williams He has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has Disclosure policy.
Prediction: Election Day will mark an ominous turning point for Wall Street Originally published by The Motley Fool