An Exceptionally Rare Event for Stocks -- the 6th Occurrence in 35 Years -- Has Historically Led to Supercharged Returns for the S&P 500

When examined over multiple decades, Wall Street's major stock indexes -- the ageless Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and innovation-propelled Nasdaq Composite (NASDAQINDEX: ^IXIC) -- are highly predictable and fully capable of hitting new all-time highs with regularity. But when narrowing things down to the span of a few weeks, months, or even years, it's a different story.

Through the first five months and change of 2025, we've witnessed the broad-based S&P 500 achieve a fresh record-closing high, as well as observed the Dow Jones and S&P 500 dip into correction territory, with the Nasdaq Composite entering its first bear market in three years.

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Stocks were particularly volatile during a one-week stretch from April 2 through 9. The widely followed S&P 500 endured its fifth-largest two-day percentage decline in 75 years from the close on April 2 through 4, then delivered its largest single-day nominal point increase in its storied history on April 9.

Image source: Getty Images.

While volatility can at times be scary, exceptionally rare events characterized by outsized levels of volatility are a historically positive signal for investors that outsized returns lie ahead.

Why did stock market volatility skyrocket in April?

Wall Street's prized measure of volatility for more than three decades is the CBOE Volatility Index (VOLATILITYINDICES: ^VIX), or VIX. In simple terms, the VIX relies on the price of options contracts to measure the 30-day implied volatility for the S&P 500. The higher the VIX, the higher the implied volatility in Wall Street's benchmark index.

During the aforementioned wild week for Wall Street in April, the CBOE Volatility Index surged above 50, which is a level it's only visited on a handful of occasions since 1990.

The bulk of this volatility stems from President Donald Trump's "Liberation Day" tariff and trade policy announcements following the close of trading on April 2. Trump introduced a global 10% tariff, as well as a series of higher "reciprocal tariffs" on dozens of countries that have historically run adverse trade imbalances with America.

Tariffs come with a host of uncertainties, including the potential for worsening trade relations with our allies, the prospect of anti-American sentiment toward U.S. goods in foreign markets, and the possibility of the prevailing rate of inflation rising domestically.

But perhaps the bigger issue with President Trump's tariff policy has been its complete lack of consistency. Wall Street values predictability above all else. Trump has paused tariffs, adjusted reciprocal tariff rates, and added and removed which goods and countries are subjected to tariffs. There's been no sustained consistency in the messaging, which has whipsawed the Dow Jones, S&P 500, and Nasdaq Composite.

Another factor that's played a role in Wall Street's outsized volatility is stock valuations.

S&P 500 Shiller CAPE Ratio data by YCharts.

In December 2024, the S&P 500's Shiller price-to-earnings (P/E) Ratio, which is also referred to as the cyclically adjusted P/E ratio (CAPE ratio), almost hit a multiple of 39. To put this into context, it marked the third-priciest reading during a continuous bull market when back-tested to January 1871.

Throughout history, there have only been a half-dozen occasions where the Shiller P/E has surpassed 30 and held that level for at least two months. The five prior instances were all, eventually, followed by declines of between 20% and 89% in the Dow, S&P 500, and/or Nasdaq Composite. In other words, a historically pricey market has been a harbinger of future volatility.

Furthermore, the bond market has played a role in whipsawing Wall Street. While significant upticks in long-term Treasury bond yields are fantastic news for buyers of fixed-income securities, it's a worrisome development for the stock market.

Bond yields tend to be reflective of Federal Reserve monetary policy and the prevailing rate of inflation. With the Fed currently in a slow-stepped rate-easing cycle, we'd expect long-term Treasury yields to be falling or remain somewhat flat. The fact that they're rising is indicative of the bond market's expectation that the inflation rate may pick up and force the central bank's hand.

Image source: Getty Images.

An ultra-rare event for stocks points to outsized returns in the coming years

For day traders and short-term investors, heightened periods of volatility can be unnerving. But for long-term-minded investors, a period of outsized volatility has consistently led to supercharged returns for the S&P 500.

To preface this discussion, there isn't an indicator or forecasting tool that can, with concrete accuracy, guarantee directional moves in the stock market. But there are metrics and events that have strongly correlated with directional moves in one or more of Wall Street's major indexes throughout history. Big spikes higher in the VIX are one such indicator that, at specific levels, tend to trigger phenomenal buying opportunities for investors.

Based on research conducted by Creative Planning chief market strategist Charlie Bilello, the VIX has endured 20 declines of at least 44.9% over a nine-week period since 1990. But what's particularly noteworthy is how stocks have performed following the six largest drops in the VIX over these nine-week stretches.

As you'll note in Bilello's post on social media platform X (formerly Twitter), there have been six times in 35 years when the VIX fell at least 50% over nine weeks. This includes the largest nine-week drop in the VIX's history -- a 63% decline (from 45.31 to 16.77) that ended the week of June 6, 2025.

The 63% decline in the $VIX over the last 9 weeks is the biggest volatility crash in history.https://t.co/rQuXrxVpWs pic.twitter.com/4d1muTTXfC

-- Charlie Bilello (@charliebilello) June 8, 2025

While the total returns (including dividends) of the S&P 500 at the six-month, one-year, and two-year marks were a bit mixed when the VIX declined by 44.9% to 49.7%, they were green across the board at the six-month mark, as well as one-, two-, three-, four-, and five-year marks, when it dropped more than 50%.

Furthermore, the S&P 500 didn't just eke out gains on a total return basis in the wake of a historic drop in volatility -- it crushed its average annual return. Whereas the S&P 500 has historically delivered a return of around 10% annually, the five previous instances where the VIX fell by more than 50% resulted in an average total return of 102.14% five years later. This works to an average annual total return of 15.1%, or roughly 50% higher per annum than the historical average.

What Charlie Bilello's data set really drives home is the oft-overlooked disparity in stock market cycles. Though stock market corrections and bear markets can be scary and tug on investors' emotions, they tend to be short-lived. According to calculations from Bespoke Investment Group, the average S&P 500 bear market lasted just 286 calendar days (about 9.5 months) between the start of the Great Depression in September 1929 and June 2023.

Conversely, the typical S&P 500 bull market has endured 3.5 times longer (1,011 calendar days) over a nearly 94-year timeline. What's more, 14 out of 27 bull markets have lasted longer than the lengthiest bear market, when extrapolating the current S&P 500 bull market to present day.

The next time the VIX rockets to rarely before-seen levels, consider it a green light to put your capital to work in the stock market.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.