Following a seemingly unstoppable bull market rally that began in October 2022, Wall Street has given investors a stern warning over the last three weeks that stocks do, in fact, move in both directions. Since Feb. 19, the iconic Dow Jones Industrial Average(DJINDICES: ^DJI), broad-based S&P 500(SNPINDEX: ^GSPC), and growth-centric Nasdaq Composite(NASDAQINDEX: ^IXIC) have respectively declined by 7.3%, 8.9%, and 12%, as of the closing bell on March 12.
This notable move lower in Wall Street's major stock indexes is in decisive contrast to the gains registered during President Donald Trump's first term in office. When Trump's first term as president ended, the Dow Jones, S&P 500, and Nasdaq Composite had gained 57%, 70%, and 142%, respectively.
With stock market volatility and investor emotions peaking, it begs the question: Is a bear market imminent under President Trump? Based solely on statistics and historical correlations, the answer couldn't be clearer.
President Trump addressing reporters. Image source: Official White House Photo by Andrea Hanks, courtesy of the National Archives.
Recessions and Republican presidencies have gone hand in hand for more than a century
Before digging in, let me preface this discussion with the obvious: There's no way to predict short-term directional moves in the stock market with concrete accuracy. If there was a data point or forecasting tool that was 100% accurate, everyone would be using it.
What investors do have are select events and data points that have strongly correlated with meaningful moves higher or lower in the Dow, S&P 500, and Nasdaq Composite throughout history. One such strong correlation has to do with recessions and Republican presidencies.
Since 1913, 19 different presidents have led our great nation -- nine Democrats and 10 Republicans. Four of the nine Democrats, including now-former President Joe Biden, didn't oversee a recession that began (keyword!) during their term.
In comparison, all 10 Republican presidents, including Donald Trump during his first term in the White House, oversaw a recession that began under their watch.
Based on a March 6 update from the Federal Reserve Bank of Atlanta's GDPNow model, first-quarter gross domestic product (GDP) is forecast to contract by 2.4%. If accurate, this would mark the biggest GDP contraction for the U.S. economy, excluding the COVID-19 pandemic years, since early 2009.
Although bear market declines can occur without a recession taking shape, recessions and bear markets do tend to play off one another. A weaker U.S. economy often leads to lower corporate earnings, which in turn can weigh down stock valuations.
If there's a silver lining here for the investment community, it's that economic cycles aren't linear. Whereas the average length of recessions since the end of World War II is around 10 months, the typical period of economic expansion since September 1945 is in the neighborhood of five years. Wagering on high-quality businesses to take advantage of disproportionately long periods of economic growth has been the much smarter move for investors.
Image source: Getty Images.
Bear markets are more common than you might realize (and that spells opportunity for investors)
In addition to every Republican president overseeing a recession while in office, bear markets tend to be far more common than investors might realize.
In June 2023, shortly after the S&P 500 was confirmed to be in a new bull market, researchers at Bespoke Investment Group published a data set on social media platform X that compared the length of every bull and bear market in the S&P 500 dating back to the start of the Great Depression. Bespoke defines a bear market as a decline of at least 20% preceded by a 20%+ rally. Meanwhile, a bull market represents a gain of at least 20% preceded by a 20%+ decline.
Since Sept. 16, 1929, there have been 27 bear market declines for the S&P 500, based on Bespoke's definition of what constitutes a bear market. Over this roughly 95.5-year stretch (to present day), it means an S&P 500 bear market has occurred, on average, every 3.53 years.
Admittedly, the stock market doesn't adhere to averages. A dozen of the 27 bear markets were logged in a less-than-13-year stretch from Sept. 16, 1929, through April 28, 1942. In comparison, from Jan. 1, 1967, through Dec. 31, 1999, there were only four bear markets. But based on statistical averages and presidential terms lasting four years, the probability would be high that a bear market takes shape under President Donald Trump.
The good news for investors is that bear markets breed opportunity. Similar to economic cycles, investing cycles are nonlinear. Bespoke found that the average S&P 500 bear market endured for just 286 calendar days, or approximately 9.5 months. Conversely, the typical bull market stuck around for a considerably longer 1,011 calendar days.
Furthermore, the longest bear market since the Great Depression lasted 630 calendar days (Jan. 11, 1973, to Oct. 3, 1974). If the current S&P 500 bull market were extrapolated to present day, it would mark the 14th bull market (out of 27) that's lasted longer than the lengthiest bear market.
Given time, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite eventually all head to new highs. This makes bear markets the ideal time for investors to pounce.
Though nothing can be said with concrete certainty ahead of time, statistics and historical correlations do point to a bear market taking shape at some point during President Donald Trump's second term.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
