Is the Trump Bull Market in Its Final Act? History Offers a Decisive Answer.

Statistically, the stock market has thrived under President Donald Trump. When his first term concluded (Jan. 20, 2017 – Jan. 20, 2021), the time-tested Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and innovation-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) had risen by 57%, 70%, and 142%, respectively.

The first year of Trump’s second term was something of an encore performance, with all three indexes climbing by double-digit percentages. The evolution of artificial intelligence, the advent of quantum computing, and the expectation of lower interest rates fueled the Trump bull market.

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However, this optimism has given way to a wall of worry over the last five weeks. Uncertainties surrounding the Iran war have heightened stock market volatility, briefly sending the Dow and Nasdaq Composite into correction territory.

While some investors see this as nothing more than a normal pullback for equities, history would beg to differ. Two aspects of historical precedent point to the Trump bull market entering its final act.

Although a lot of attention is rightly being paid to the unprecedented energy supply disruption caused by the Iran war, as well as the subsequent oil price shock, history reminds us that midterm election years are generally bad news for the stock market.

For the moment, Republicans hold a majority in both houses of Congress and control the White House. However, the party in the White House has lost seats in Congress in 20 of the last 23 midterms (dating back to 1934). The Republican majority in the House of Representatives is so narrow that it wouldn’t take much of a swing in votes to shift the majority to Democrats.

In some ways, a divided Congress could be good news for Wall Street in the sense that no major legislation is likely to be signed into law. At the same time, shake-ups can lead to uncertainty, which is the enemy of investors.

According to Carson Group’s Chief Market Strategist, Ryan Detrick, we just entered the worst quarter of the presidential cycle, based on S&P 500 quarterly returns. Whereas year three of a president’s term is typically all systems go for investors, the second quarter of year two (April 1 – June 30) is one of only two quarters that have averaged a negative return since 1950. Over the last 75 years, the second quarter of year two has delivered an average decline of 2.8% in the benchmark index.