The Stock Market Just Did Something That's Only Happened in 4 Other Periods Since 1987. History Offers a Crystal Clear Answer for What Happens Next
President Donald Trump's tariff announcements on April 2 triggered a historic sell-off. The broader benchmark S&P 500 (SNPINDEX: ^GSPC) fell an astounding 10.5% in two days, one of the worst moves seen in nearly 40 years. In fact, the move was so bad that it's only happened in four other periods since 1987. Situations like this can be very scary for investors because it seems like the selling will never end and that the world might be permanently changed.
With tariffs, Trump is attempting to reconfigure the global supply chain, bring manufacturing back to the U.S., and erase the country's global trade deficit, an ambitious slate of goals to pursue all at once and so swiftly. The future is always uncertain, but history offers a crystal clear answer for what has historically happened after this kind of intense sell-off.
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Where are stocks headed next?
The stock market has suffered several steep sell-offs over the last four decades, typically caused by some disturbance in the economy. In 1987, there was Black Monday, then the Great Recession in 2008, and of course the COVID-19 pandemic in 2020. The Great Recession in 2008 led to multiple two-day sell-offs that are among the worst of all time, although I am grouping these seven instances into one period, considering they all happened within two months.
| Starting Date of Two-Day Sell-Off | S&P 500 Move |
|---|---|
| 10/19/1987 | -24.6% |
| 10/7/2008 | -9.4% |
| 10/9/2008 | -8.7% |
| 10/10/2008 | -8.7% |
| 10/15/2008 | -9.5% |
| 10/22/2008 | -9% |
| 11/6/2008 | -10% |
| 11/20/2008 | -12.4% |
| 3/9/2020 | -9.2% |
| 3/12/2020 | -13.95% |
| 4/4/2025 | -10.5% |
Data gathered by MarketWatch. Sources: Truist IAG, FactSet.
As you can see, while the two-day sell-off that started on April 4 is among the worst, more severe moves occurred on Black Monday, during the Great Recession, and at the start of the pandemic. It's also important to note that there were multiple two-day sell-offs during the Great Recession and the pandemic, so trying to catch a falling knife is often more difficult than it appears.
Considering the uncertainty around tariffs, how long the Trump administration is determined to leave them in place, and the range of responses from other countries, I think this saga is far from over, so investors shouldn't count on things getting better overnight, in a week, or even a month. Trump is very unpredictable, so conditions might improve but there's certainly no guarantee.
There is, however, one thing that history has been crystal clear about: After every single one of these sell-offs, the S&P 500 index bounced back significantly within one year. According to data gathered by MarketWatch from sources including Truist IAG and FactSet, stocks were reliably higher one year after each one of these two-day sell-offs. In fact, they averaged a 27.2% gain one year later. Two years later, the average gain was over 40%, so there is light at the other end of the tunnel.
In the one year following the two-day sell-offs, the range of outcomes varied, from the S&P 500 rising only 6.2% to 59% higher. The low case followed Oct. 7-8 in 2008, while the high case followed March 12-13 in 2020.
What to do when the market is in panic mode
As the data above shows, you can never prepare for these kinds of situations. As the famous boxer Mike Tyson once said, "Everyone has a plan until they get punched in the mouth."
When you are in the middle of a broad market sell-off, understand that it is nearly impossible to time the market. Sell-offs can continue longer than investors think, and they can also start and stop again. The best course of action is likely to do nothing. Sure, there may be a stock here or there that has seen its outlook change, or perhaps you've been holding losses for a while, and it might simply be best to get rid of a stock to reap some tax advantages.
But by and large, the best course of action is to stay calm. If you have available capital that you can afford to lose without leading to financial hardship, then now might be the time to put money to work if you can also take a long-term investing horizon. The data is crystal clear in that stocks will rise again. It just takes some time.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FactSet Research Systems and Truist Financial. The Motley Fool has a disclosure policy.
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