Currently, average household equity allocations suggest that the U.S. stock market will deliver a real total return of minus 1.5% annualized over the next four years.
More than any other Inauguration Day in U.S. history, President-elect Donald Trump is expected to find a stock market that is too high on his first day in office.
Trump is known for seeing the stock market as a measure of his success. If the market does even slightly better than its historical average over the next four years, Trump will have his work cut out for him.
Take a look at the table below to see the implicit forecasts of the valuation indices. They were put in that table because they could predict the U.S. market’s predicted return over ten years. They can also do a good job of predicting returns over four years. Most of the time, they are assuming that the stock market will only keep up with inflation until January 20, 2029, which is Inauguration Day.
The average U.S. household’s stock allocation is the most statistically significant of the ones in this table when it comes to predicting returns over four years.
The chart below shows where this indicator was on each Inauguration Day starting in 1952, along with the stock market’s total gain over the next four years, taking inflation into account. The best fit for the data is the steeply sloping line that goes down. This shows that higher average family equity allocations are linked to lower returns over the next four years.
Another thing you can see in the chart is the vertical green line that shows the current amount of the average household equity allocation, which is 51.8% compared to 48.3% at the start of 2024. Based on the trendline of the chart, the real total return over the next four years will be -1.5% per year.
It doesn’t happen again, but history often rhymes. Even though there is a statistically significant decline, there is still a lot of noise in the data, as shown by the chart. Before this year, the most money that households had invested in stocks and bonds was on January 20, 2020. Since then, the S&P 500 has produced a 9.3% annualised total return, which is higher than its 7.2% real-return average since 1952.
That being said, it’s safe to say that the value winds won’t be in stocks’ favour over the next four years. The table above shows where each of the signs I keep an eye on is now compared to where it was in the past for three different time periods: since 2000, 1970, and 1950. Many of the readings are at 100%, which is the most negative. Most of the readings are above 90%.
