What a difference a few months can make. Beginning Nov. 6, just hours after Donald Trump had been elected as the 47th president, the mature stock-powered Dow Jones Industrial Average (^DJI +1.79%), broad-based S&P 500 (^GSPC +1.20%), and innovation-inspired Nasdaq Composite (^IXIC +1.52%) all rocketed higher.
President Trump's return to the White House offered investors hope for an encore performance. During Trump's first term, the Dow, S&P 500, and Nasdaq Composite gained 57%, 70%, and 142%, respectively.
President Trump delivering remarks at the Republican Governors Association. Image source: Official White House Photo.
Donald Trump campaigned on the idea of reducing the peak marginal corporate income tax rate by 29% for businesses that manufacture their products domestically. Following the signing of Trump's flagship Tax Cuts and Jobs Act into law in December 2017, corporate buybacks for S&P 500 companies soared.
He's also known for his stance on deregulation, which should pave the way for more mergers and acquisitions, as well as allow innovations an easier path to the marketplace.
But since Inauguration Day, the S&P 500 (briefly) and Nasdaq Composite have both fallen into correction territory, with declines surpassing 10%.
The president's tariff policy has thrown Wall Street into a fit, and it's only fair to ask: Will Donald Trump's "Liberation Day" be a disaster for the stock market?
What is Liberation Day, and why is Trump so heavily focused on tariffs?
For weeks, Trump has been hailing April 2nd as America's Liberation Day. This is the date he plans to use executive orders to implement a sweeping number of reciprocal tariffs on countries that have noted trade imbalances with the U.S. Although the exact nature of the tariffs to be implemented remains fluid, some specifics have been announced, such as 25% tariffs on vehicles and auto parts imported into the U.S.
On March 21, Trump had this to say in a post on his social media platform, Truth Social:
April 2nd is Liberation Day in America!!! For DECADES we have been ripped off and abused by every nation in the World, both friend and foe. Now it is finally time for the Good Ol' USA to get some of that MONEY, and RESPECT, BACK. GOD BLESS AMERICA!!!
Trump's goal with tariffs, which are an added tax on imported or exported goods, is to protect domestic jobs and make American-made goods more price competitive. For instance, if ready-to-sell vehicles made outside the U.S. are imported into the country after April 2, they'll carry a 25% added tax, which increases their price and potentially makes American-made vehicles more attractive to cost-conscious consumers.
The president's aim is for trade imbalances to lessen or disappear entirely, and for American manufacturers to reap the rewards.
Is Liberation Day a disaster in the making for Wall Street?
With a better understanding of why tariffs are so important to President Trump, let's return to the question at hand: Will Liberation Day sack the stock market?
In December, four New York Federal Reserve economists at Liberty Street Economics published a report that dug into the effects of Trump's China tariffs in 2018-2019 on the stock market. Their report (Do Import Tariffs Protect U.S. Firms?) also examined the future outcomes of public companies directly impacted by the U.S.-China trade war.
Image source: Getty Images.
Probably the least-surprising of all findings was that public companies directly exposed to the 2018-2019 China tariffs performed worse on tariff announcement days than those without any exposure. We're witnessing this same uncertainty play out on in the stock market right now.
However, the more intriguing analysis had to do with the future outcomes of the companies that fared worst on tariff announcement days. Liberty Street Economics found that, from 2019 to 2021, the average poor performer exposed to China tariffs saw their profits, employment, sales, and labor productivity all decline. This is to say that the adverse effects of Trump's tariffs extended well beyond their initial start date.
While the stock market took the escalator lower shortly after Trump introduced tariffs on China in 2018, there's one notable difference between equities then and now: valuation.
Prior to the Dow, S&P 500, and Nasdaq Composite rolling over during the fourth quarter of 2018, the S&P 500's Shiller price-to-earnings (P/E) Ratio, which is also known as the cyclically adjusted P/E Ratio (CAPE Ratio), neared 33. In comparison, the Shiller P/E Ratio came within a stone's throw of 39 during the current bull market cycle in December 2024.
S&P 500 Shiller CAPE Ratio data by YCharts.
There have only been six instances spanning 154 back-tested years where the Shiller P/E has surpassed 30 for at least two consecutive months. Following the previous five instances, one or more of Wall Street's major stock indexes shed at least 20% of their value. With the current stock market pricier than in late 2018, there's potentially more air that can be let out of the Wall Street's proverbial sails by tariff-related uncertainty.
While Liberty Street Economics' analysis doesn't point to an outright disaster for the stock market, the historical priciness of stocks, coupled with previous correlations in 2018-2019, does suggest headwinds lie ahead.
Stock market weakness is historically an opportune time for investors to pounce
Considering how much uncertainty there is surrounding President Trump's Liberation Day, the prospect of putting your money to work in stocks may not sound palatable. But if you have a long-term mindset, stock market corrections of any kind have historically been an opportune time to put your capital to work.
Every year, the analysts at Crestmont Research update a published data set that examines the rolling 20-year total returns, including dividends, of the benchmark S&P 500 dating back to the start of the 20th century. Even though the S&P didn't officially exist until 1923, the researchers at Crestmont were able to track the total return of its components in other major indexes to 1900. This extensive back-testing yielded 106 rolling 20-year periods (1900-1919, 1901-1920, 1902-1921, and so on, to 2005-2024).
^SPX data by YCharts. The above chart of the S&P 500 only goes back as far as 1950.
What's notable about Crestmont's data set is that all 106 rolling 20-year periods produced a positive total annualized return. In plain English, if you had, hypothetically, put money to work in an S&P 500 tracking index at any point between 1900 and 2005 and simply held onto your investment for 20 years, you made money 100% of the time. It didn't matter whether there were recessions, depressions, pandemics, wars, or tariff scares -- the S&P 500 was higher, on a total return basis, 20 years later every single time.
Despite having correlative data to examine from Liberty Street Economics, there's no guarantee that the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite are going to stay true to history over the short run. But based on what more than a century of investing data plots have shown, a growing U.S. economy fuels higher stock valuations over time.
If President Donald Trump's Liberation Day ultimately weighs down the stock market, use it as an opportunity to invest for your future.
