Though history doesn't precisely repeat, it does have a way of rhyming on Wall Street.
With the exception of a two-month stretch during the early stages of the COVID-19 pandemic, the U.S. economy has been firing on all cylinders for the better part of 16 years. Berkshire Hathaway‘s billionaire CEO, Warren Buffett, has cautioned investors on numerous occasions not to bet against America, and this is the tangible data that conclusively backs up his opinion.
However, boom and bust cycles are both perfectly normal for the U.S. economy. The all-important question to be asked is: Will the next U.S. recession materialize under President Donald Trump?
While there's no way of guaranteeing the answer to this question, there are select correlations spanning more than 110 years that intimate whether a U.S. recession is imminent under President Trump, and what that might ultimately mean for the Dow Jones Industrial Average (^DJI 0.13%), S&P 500 (^GSPC -0.01%), and Nasdaq Composite (^IXIC -0.32%).
President Trump signing an executive order. Image source: Official White House Photo.
Is a recession forthcoming in Trump's second term?
Although history doesn't typically repeat to a T on Wall Street, it does have a tendency to rhyme. Since 1913, we've witnessed an intriguing correlation emerge with regard to economic downturns and the political party in power.
Over the last 112 years, nine Democrats and 10 Republicans have occupied the White House. Four of the nine Democratic presidents didn't oversee a U.S. recession that began during their tenure; but a few did inherit a recession, such as Barack Obama following the presidency of George W. Bush. In comparison, all 10 Republican presidents, including Donald Trump during his first term, have overseen a recession that began under their watch.
To be clear, this doesn't mean Republican policies are necessarily bad for the economy. Once again, economic downturns are a normal, healthy, and inevitable part of the economic cycle.
With the exception of a very brief period during the early part of the COVID-19 pandemic, the U.S. economy has been steadily growing for 16 years. US GDP data by YCharts. GDP = gross domestic product.
But there is potential cause for concern that President Trump's tariff and trade policy can tilt the U.S. economy into a recession.
On April 2, the president introduced a 10% global tariff, as well as higher “reciprocal tariff rates” that specifically target a few dozen countries that have historically had adverse trade imbalances with the U.S. Over the last two months, Trump has amended his tariff and trade policy on numerous occasions. Earlier this week, a federal court blocked Trump's sweeping tariffs on imports, which likely paves the way for a Supreme Court showdown on the issue.
Should tariffs stick around, they run the risk of worsening trade relations with key American trade partners, might incite negative consumer sentiment toward American goods, and have the potential to reignite the prevailing rate of inflation in the U.S.
Additionally, the initial gross domestic product (GDP) read for the first quarter, via the U.S. Bureau of Economic Analysis, showed a 0.3% annual rate of contraction. Two consecutive quarters of a shrinking economy is a common definition of a U.S. recession
Based on 112 years of correlative history, along with tangible first-quarter U.S. GDP data, there appears to be a heightened probability of a recession occurring under President Trump. Even though the U.S. economy and stock market aren't linked at the hip, a shrinking economy would be expected to negatively impact corporate earnings and weigh down the Dow Jones, S&P 500, and Nasdaq Composite.
Image source: Getty Images.
The silver lining: Economic and stock market cycles aren't linear
While more than a century of correlations portends a recession materializing at some point during Donald Trump's presidency, the statistical data doesn't support the idea of a recession being imminent.
Although the initial first-quarter GDP read showed a contraction in the U.S. economy, the Federal Reserve Bank of Atlanta's GDPNow forecasting model, which has been reasonably accurate since its creation in August 2011, is projecting a 2.2% annualized GDP growth rate for the June-ended quarter. This would make the first quarter contraction nothing more than a minor blip for the U.S. economy.
More importantly, economic and stock market cycles aren't mirror images of each other, and this nonlinearity is a fantastic thing for working Americans and investors.
Though a lot of worry and emphasis is placed on the possibility of the U.S. economy dipping into a recession, there's a night-and-day difference between periods of growth and downturns. Since the end of World War II, the typical U.S. recession has lasted only 10 months, with none surpassing 18 months in length.
On the other hand, the average period of economic expansion has endured for around five years, with two periods of growth surpassing the decade mark. Even though recessions are inevitable, they're decisively short-lived.
It's a somewhat similar story when looking at the stock market and how the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite respond over extended periods.
It's official. A new bull market is confirmed.
The S&P 500 is now up 20% from its 10/12/22 closing low. The prior bear market saw the index fall 25.4% over 282 days.
Read more at https://t.co/H4p1RcpfIn. pic.twitter.com/tnRz1wdonp
— Bespoke (@bespokeinvest) June 8, 2023
In June 2023, shortly after the broad-based S&P 500 was confirmed to be in a new bull market, the researchers at Bespoke Investment Group published a data set to social media platform X (formerly Twitter) that detailed the glaring differences in length between S&P 500 bull and bear markets.
In one corner, the average S&P 500 bear market lasted just 286 calendar days (roughly 9.5 months) since the start of the Great Depression (September 1929), and the lengthiest bear market endured for 630 calendar days. On the other end of the spectrum, the standard bull market has stuck around for 1,011 calendar days, with 14 out of 27 bull markets (including the current bull market, when extrapolated to present day) lasting longer than the lengthiest bear market.
While it's easy to focus on fear and the proverbial “what if's” on Wall Street, historical data conclusively shows that time is a powerful ally. Even if the U.S. economy and stock market hit a rough patch during Trump's second term in office, there's no reason to believe equities won't be notably higher in the years that lie ahead.
