Replaying 1928, is the surge in the US stock market just temporary?

Trump 2.0 is about to return to the White House, and the U.S. stock market is 迎来 a new round of 上涨. However, Bloomberg columnist John Authers believes that the second round of rebound seems to be somewhat of a “replay” of the situation in 1928.

From Herbert Hoover's election in 1928 to the outbreak of the Great Depression in 1932, history has long proven that a stock market rebound does not necessarily mean economic prosperity.

Similarly, although Trump's re-election has brought a short-term rise in the stock market, risks such as high market valuations, debt pressure, and inflation are accumulating, making the future direction of the U.S. economy even more unpredictable.

Perhaps the market should not rely on stock market performance to judge economic conditions. The volatility of the stock market is significant, and short-term stock market rebounds cannot predict long-term economic development.

1928 and 2024: Striking Similarities

Looking back at 1928, when Herbert Hoover was elected President of the United States, the stock market also experienced a strong rebound similar to today.

At that time, the U.S. was undergoing an economic boom known as the “Roaring Twenties,” with the automobile, electrical, construction, and steel industries together forming the four engines of American economic development. In this unprecedented prosperous scenario, all worries or dissenting voices were drowned out.

Unregulated bank funds flowed massively into the stock market, and stock trading was exceptionally hot. The total value of stocks on the New York Stock Exchange was $27 billion in 1925, soaring to $87 billion by September 1929, a fourfold increase, with the stock market skyrocketing.

Despite the stock market boom, the fundamentals of the economy had already shown signs of fatigue. The purchasing power of the average American had been overstretched, and wealth inequality limited the ability for continuous economic development, restricting economic expansion.

October 24, 1929, known as “Black Thursday,” marked the beginning of the U.S. stock market crash. On this day, the stock market performed extremely poorly, with trading volume on the New York Stock Exchange reaching 12.895 million shares, setting a historical record at the time. A wave of market sell-offs surged like a burst dam. What followed was a decade-long Great Depression disaster.

Now, with Trump elected again, the U.S. stock market has experienced a significant rebound, especially in industries aligned with Trump's policies, which have performed particularly strongly.

In a sense, Trump's 2.0 economic policies are seen by the market as a “good prescription” for revitalizing the U.S. economy. However, historical lessons tell us that the volatility of the stock market is immense, and short-term gains do not mean long-term economic improvement.

Overvaluation Becomes a Hidden Danger

Authers believes that the high valuation of the U.S. stock market is a significant risk currently facing the market.

Taking the S&P 500 index as an example, the current market valuation is close to historical highs. High stock market valuations often mean that returns in the stock market over the next few years will be far below expectations. Especially during the post-pandemic global economic boom in 2021, the S&P 500's valuation reached new highs, while the current valuation is comparable to that during the 2000 internet bubble.

More notably, the cyclically adjusted price-to-earnings (CAPE) ratio also shows similar warning signals. CAPE corrects for market volatility by comparing stock prices with inflation-adjusted earnings over the past decade Data shows that the current CAPE ratio is close to 38, nearly matching the level when George W. Bush was elected in 2000, a period that coincided with the peak of the internet bubble. While this does not directly predict a stock market crash, it does indicate that the market's high valuation may suggest relatively low future returns.

Beware of Inflation Pressures

Authers also pointed out that, in addition to the high valuation of the stock market, changes in the bond market are also concerning.

After the election, U.S. Treasury yields surged, particularly the yield on the 10-year Treasury, raising market concerns that the Trump administration's tax cuts and tariff policies could lead to inflationary pressures, and that the Federal Reserve might pause its rate-cutting cycle as a result.

The spread in the bond market has narrowed to historical lows. A similar situation occurred in 2007, when the spreads on high-risk debt narrowed, ultimately leading to the subprime mortgage crisis and the global financial crisis.

Additionally, rising prices and high interest rates are also significant risks in the current economic situation. Authers noted that the U.S. inflation rate has already far exceeded the Federal Reserve's target, and after the election, market expectations for future rate cuts have shifted, with expectations that the Federal Reserve may maintain higher interest rates to combat inflation.

A high interest rate environment will increase corporate financing costs, squeeze consumer spending, and potentially slow economic growth.

Authers believes that while Trump's economic policies may provide some short-term stimulus, particularly in terms of tax cuts and trade, in the long run, the current high valuation of the stock market and rising debt levels cast a shadow over future economic growth