How Likely Is a Stock Market Crash Under President Donald Trump? Several Century-Old Data Sets Offer an Answer.

U.S. equity benchmarks have rallied strongly under President Trump—during his first term the Dow, S&P 500 and Nasdaq returned 57%, 70% and 142% respectively, and from Jan. 20, 2025 to Feb. 2, 2026 they rose ~14%, 16% and 20%—driven in part by lower peak corporate tax rates and Fed easing. However, valuation risks are elevated: the Shiller CAPE hovered between 39–41 (second-highest on record), and historical episodes with CAPE >30 have preceded eventual 20%–89% index declines; additionally, data show correlations between Republican presidencies and recession starts and notable midterm-year volatility (average S&P midterm drawdown ~17.5%). For portfolio managers, this implies a defensive tilt to guard against heightened near-term downside while recognizing long-term rolling 20-year returns have historically been positive, supporting a measured buy-and-hold stance rather than outright market abandonment.

Analysis

Market structure: Lower corporate tax and an expected Fed easing cycle concentrate winner-take-most gains into large-cap, cash-generative tech and market infrastructure (NVDA, NFLX, NDAQ). Small caps, high-debt cyclicals and bank margins look vulnerable if rates compress or recession hits; expect continued indexing flows to amplify large-cap leadership and higher implied vol in single-name options.

Risk assessment: Key tail risks are a policy shock (tariff escalation), a sticky inflation surprise that prevents Fed easing, or a CAPE-driven mean reversion producing a 20–50% drawdown over 6–24 months. Near-term (days–weeks) headline/midterm volatility will dominate; medium-term (3–9 months) catalysts are CPI/ISM/payrolls and earnings guidance; long-term (12–36 months) downside is driven by valuation reversion and buyback unwind.

Trade implications: Favor selective growth exposure while hedging index risk. Use concentrated longs (NVDA) funded by trimming small-cap cyclicals (IWM/XLF) and protect with index or VIX-linked downside structures; market-structure winners (exchange fees, NDAQ) are tactical longs for 6–18 months if listing/trading volumes stay +5% YoY.

Contrarian angles: The CAPE signal times poorly — AI-driven earnings upside and buybacks can sustain higher multiples faster than historical averages imply, so a blanket de-risking is likely overdone. However, don’t dismiss phased hedging: reduce beta now, reconcentrate if macro surprises favor growth over a 3–12 month window.

Key Decisions for Investors

• Establish a 1–2% portfolio long NVDA via 12–24 month LEAPS (buy Jan 2028 calls or equivalent) and allocate 0.5–1% to buy 3–6 month 8–12% OTM puts as downside insurance; trim if NVDA rallies >30% or quarterly revenue growth falls below 20% YoY.
• Buy a 1–2% position in NDAQ shares as a play on listing/derivatives fee tailwinds; target a 6–18 month hold and sell/trim if sequential listing/trading revenue growth decelerates below +5% YoY or if realized equity volumes drop >15% QoQ.
• Allocate 1% of portfolio to SPY 3-month 5% OTM puts (or equivalent VIX call spread) as a systemic hedge against a 15–25% market drawdown; reduce hedge if SPY remains within +5% and macro data (CPI, payrolls) confirm disinflation over two consecutive months.
• Reduce small-cap/cyclical exposure (IWM, XLF) by 5–10% of portfolio and reallocate that weight into a 3–6 month T-bill ladder or cash to preserve optionality during midterm-driven volatility (expect average midterm intra-year drawdown ~17.5%).
• Execute a pair trade: long NVDA (1% notional) vs short IWM (0.5% notional) to isolate secular growth vs cyclical risk; rebalance or unwind if the spread widens >30% or if trailing 30-day market breadth recovers above its 1-year average.