Is a Stock Market Crash Imminent Under President Donald Trump? Here's What History Says Could Come Next.

There are a lot of ways to describe the second Trump administration, but the word "volatile" seems to sum it up quite nicely. Within less than two years, the president has waged a trade war against most U.S. allies, launched a kinetic war in the Middle East, and repeatedly harangued two successive Federal Reserve chairmen to lower interest rates, despite the inflationary effects of his other two policies.

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Amid the chaos, the S&P 500 (SNPINDEX: ^GSPC) has continued to chug upward, returning an impressive 33% since Trump's election victory on Nov. 5, 2024. The surging growth in new industries like artificial intelligence (AI) has allowed Wall Street to ignore the increasingly uncertain political situation. Let's dig deeper to find out why a stock market crash could be imminent and decide what investors should do to come out ahead.

Under Trump, U.S. government policy has begun to sharply diverge from many of the administration's stated economic goals, including lowering inflation and reducing the national debt. The escalating war in Iran has caused the U.S. inflation rate to hit 3.4% year over year in July, well above the Federal Reserve's target of 2%.

The persistently high inflation makes it harder for the Fed to justify lowering rates. That's because while lower rates would stimulate the economy by reducing borrowing costs, they could also cause prices to rise even faster, worsening the overall economic situation.

The nation of Turkey is a cautionary tale. From 2021 to 2023, the Eurasian country slashed rates amid high inflation, exacerbating a massive cost-of-living crisis that it is still struggling to overcome.

Trump doesn't seem to have learned from other countries' mistakes. In an ongoing pressure campaign, the president is now threatening to halt trade with all countries that have a surplus with the U.S. unless the Fed lowers rates. If such an extreme policy were implemented, it would likely cause inflation to spike further and make rate cuts even more unfeasible.

Can the stock market withstand more political uncertainty?

Historically, stock market performance has been driven more by economic fundamentals, innovation, and corporate earnings than by the direct impacts of government policy. That said, there are growing signs that Trump's unorthodox decisions are bleeding into the regular economy.