- Only Richard M. Nixon’s second term has offered a worse return from US equities, 100 days in, than Trump’s second stint
- There are further macro and geopolitical echoes between 2025 and 1973
- A bad start to a presidency does not guarantee poor returns over the full term
- April’s rally offers hope to US equity bulls
- Valuation may yet be the biggest stumbling block to further gains in US equities
“As President Trump approaches 100 days in office, an 11% rally in America’s S&P 500 index from its closing low on 8 April may just stop his second term in office from offering investors the worst start of any post-war American leader, in terms of stock market returns,” says AJ Bell investment director Russ Mould.
“The S&P 500 is down by 7.9% since Trump’s inauguration on 20 January and only Richard M. Nixon’s second term offered a tougher start for investors, as the index fell by 9.9% in the first 100 days of his second term back in 1973.”
“The rough start to Trump’s second presidency, so far as share prices and the dollar is concerned, represents a remarkable shift in sentiment, given the rapturous welcome given to Trump’s election victory last November, when the S&P 500 (and the greenback) soared, while US Treasury yields remained stable.
“The imposition of blanket tariffs, an escalation of tensions with China and then a flurry of sidesteps and backtracks, as additional reciprocal levies are delayed, exemptions are provided for technology hardware and tentative olive branches are offered to Beijing leave everyone confused and seem to be shaking markets’ prior strong faith in American exceptionalism.
Source: LSEG Refinitiv data. * John F. Kennedy assassinated in November 1963 and replaced by Lyndon B. Johnson. ** Richard M. Nixon resigned August 1974 and replaced by Gerald R. Ford. *** Donald J. Trump to 25 April 2025.
“The outperformance of US equity indices, the concomitant surge in the stock market capitalisation of the S&P 500 to an all-time high as a percentage of global market cap, and the lofty (and in some cases record high) earnings multiples applied to the US market all reflected how markets had already convinced themselves that America was great.
“Their reassessment of this view shows in how US indices have retreated and taken valuation multiples lower. Now investors must wait to see if corporate earnings start to weaken to provide another challenge.
“April’s rally offers some hope, although to what degree this is based upon hopes for trade deals between America and other nations that may or may not appear remains to be seen.
“Additional good news for investors comes in how the data shows that a sticky start does not mean a presidency is doomed to provide poor returns over its full term. Truman and Eisenhower’s first stint in office are clear about this. However, it is noticeable that the only presidencies which offered beginnings as weak as this one offers may be uncanny echoes of current circumstances.
“George W. Bush took office in January 2001, just as the technology, media and telecoms bubble bull run turned into a massive bust. Investors fled as earnings disappointment, not to mention a rash of initial public offerings and secondary issues, persuaded them to realise valuations were untenably stretched.
Source: LSEG Refinitiv data
“None of this could be laid at Bush’s door and a difficult macroeconomic environment also made Nixon’s second term a treacherous one for US equity investors.
“However, this is where the echoes with current events get stronger still, thanks to the so-called Nixon shock of summer 1971.
“To help fund military conflict in Vietnam and welfare programmes at home, Nixon took the dollar off the gold standard, let the US currency slide and imposed tariffs on imports in an attempt to reset the global financial system to American advantage. An unexpected oil price spike in 1973, thanks to an Arab embargo in the wake of American support for Israel, complicated matters no end, but Nixon’s actions set off a chain of events that ushered in an era of inflation, if not stagflation, and misery (in real terms) for anyone who owned US equities, US bonds or cash – only gold and ‘real’ assets (commodities) provided a real bolt-hole.
Source: LSEG Refinitiv data
“The S&P 500 did not look too bad in nominal terms, but post-inflation, real-terms returns were poor, as reflected in how the valuation attributed to US corporate earnings collapsed.
“During Nixon’s second term, the S&P 500 derated from a multiple north of 20 times – similar to where we are now – to a rating of barely nine times. Worse was to follow, as US equities bottomed on a price/earnings ratio of less than seven times in the early 1980s, to show the danger posed by any sustained bout of lofty inflation rates.
Source: LSEG Refinitiv data
“Trump’s determination to lessen America’s trade deficit, weaken the dollar and re-set global trade terms smacks of Nixon’s plan, and also comes at a time when Federal finances hem in the president, albeit this time in the form of record borrowing levels rather than the straitjacket of the gold standard.
“Investors must now answer two sets of (inter-related) questions when they assess portfolio allocations:
- Do markets now feel less comfortable owning dollar-denominated assets, owing to the Trump presidencies policies, and how they are being implemented? If so, they may have further to fall as valuations are recalibrated lower to reflect such doubts and the scope for policy error and earnings disappointment. If not, the current chaos could indeed be a classic chance to ‘buy on the dip,’ a viewpoint that the April rally may seem to vindicate.
- Is the economic environment now going to be markedly different (as it was after the Nixon shock)? Since the Great Financial Crisis, low growth, low inflation and low interest rates have prevailed, to be benefit of long duration and secular growth and yield asset such as tech and biotech stocks and (long-dated) bonds. If the world is different, with more inflation, higher and more volatile interest rates and less predictable growth, is it not logical to expect different asset options to outperform? Gold (and commodities) may, again, be the best guide here.
Source: LSEG Refinitiv data
“Ultimately, the biggest challenge is how well US equities have done for the last decade or so. Those lofty valuations were always at risk of being exposed in the event of any unexpected shock that took markets away from the anticipated scenario of a further period of low growth, low inflation and predictably low interest rates. Anything could have tipped over the S&P 500. It just happens to have been Trump and tariffs, at least so far.
“As the economist J.K. Galbraith wrote: ‘The least important questions are the ones most emphasised. What triggered the crash? This is not very important, for it is in the nature of a speculative boom that almost anything can collapse it. Any serious shock to confidence can cause sales by those speculators who have always hoped to get out before the final collapse but after all possible gains from rising markets have been reaped. Their pessimism will infect those simpler souls who had thought the market might go up for ever but who will now change their minds and sell.’”
