Ever since Donald Trump returned to the White House in January, stock market expectations have been volatile – driven in part by a healthy dose of motivated reasoning.
At first, markets surged on hopes of lower taxes and deregulation. But this enthusiasm soon faded as announcements about tariffs and stricter immigration policies dampened sentiment. Underscoring that point, on March 3, the Dow Jones Industrial Average fell more than 600 points after Trump said that tariffs he had been threatening for weeks would indeed be imposed on Canada and Mexico the following day.
In all of these cases, investors weren’t just reacting to economic fundamentals. They were projecting their own assumptions onto them, helping shape market reality.
Financial forecasting is notoriously tricky, and it’s not easy to separate meaningful data from mere “noise.” But it’s still worth asking: Are American investors ready for a new period of economic and financial turbulence? Will Trump fuel another Wall Street rally? Or will uncertainty drag markets down?
With two decades of experience studying politics and finance, I believe that presidential rhetoric and policies can create uncertainty – and that uncertainty affects the market. Specifically, stock prices tend to rise when companies expect higher profitability and fall when uncertainty outweighs the gains.
Trump’s dramatic policy shifts are already sending mixed signals to the markets. And what happens in the next four years could reshape America’s financial future. Today, more than 60% of Americans are tied to the stock market through retirement and investment accounts, which means the repercussions will go far beyond Wall Street.
Presidential elections have a well-documented impact on financial markets.
Stocks tend to rally in the weeks leading up to the vote, but risk jumps by about 15% as investors brace for uncertainty.
Many analysts, particularly those in business or finance, may assume that stock markets would do better under Republican administrations, as their purportedly pro-business, market-friendly policies are bound to improve returns. But history suggests otherwise: Over the past 70 years, markets have delivered 9% higher returns under Democratic than Republican presidencies.
Does that mean Democrats are better at managing the economy? Not necessarily. Research suggests that timing is key. Democrats tend to take office during economic downturns, inheriting markets that are primed for recovery – essentially, to use the parlance of markets, they “buy low.”
Republicans, on the other hand, often inherit strong economies with limited upside, as they tend to assume office during periods of economic growth. This leaves less room for gains, especially when the market is already stable.
Markets love stability and predictability. Yet when political shifts introduce volatility, investor confidence – and ultimately stock valuations – can be shaken.
Trump’s policies have already created significant uncertainty. The recent announcements of tariffs on goods from Canada, Mexico and China led to big market swings, particularly in industries reliant on global supply chains such as tech and manufacturing. Trump temporarily postponed the new tariffs on Mexico and Canada, but the new tariffs on China went into effect as planned – an inconsistency that itself worsened uncertainty. If Trump continues down this path, U.S. companies relying on international trade will be faced with greater uncertainty.
Many Americans – especially those nearing retirement age – are watching closely as the president’s policy agenda takes shape. What it all means for their lives, and how it will affect investments, market stability and broader economic trends, is an open question.
But for investors weighing risk and reward, understanding the interplay between uncertainty, economic policy and market dynamics is essential. A second Trump term has the potential for significant shifts – for Wall Street and the economy as a whole.
Art Durnev is the distinguished chair in finance at the Robins Business School of the University of Richmond. Distributed by The Conversation and The Associated Press.
