Recently, stock indexes have been setting records, but not the kind favored by investors. On Friday, the S&P 500 recorded its worst performance since the onset of the pandemic in 2020. Both the S&P 500 (^GSPC, -5.97%) and the Nasdaq (^IXIC, -5.82%) ended the quarter on March 31 with their weakest performances since 2022. The Nasdaq even entered a bear market last week, experiencing declines of more than 20% from its latest peak. In light of these developments, it can be described as a market crash.
The disruption is attributed to President Trump’s tariffs on imports. Investors and analysts express concern that these tariffs could negatively impact corporate and economic growth domestically, especially after the president expanded his initial tariff plan to cover more countries and increased taxation levels. The question remains: what will follow this market crash? Historical patterns provide some clarity.
A market crash is typically defined by a rapid decline in stock indexes exceeding 10%, which is happening now. The Nasdaq has decreased by approximately 10% over the past week, with the S&P 500 and the Dow Jones Industrial Average not far behind.
As noted, uncertainty about Trump’s tariffs, which include levies on a wide range of imported goods, is troubling investors. U.S. companies, particularly high-growth tech firms, import raw materials and finished products and will face increased costs due to these tariffs. They have the option to either absorb the costs or transfer them to consumers, potentially affecting their earnings through higher expenses or reduced customer numbers.
Learning from past periods of elevated costs, such as inflation and U.S. recessions, can offer insights into potential outcomes of the current crash. Previous instances of higher inflation, like those in the early 1990s and more recently in 2022, led to decreases in the S&P 500, but not to crashes, with the index rebounding swiftly once inflation subsided.
Historically, market crashes have coincided with recessions, such as the dot-com bubble in 2000, the 2008 financial crisis, and the coronavirus crash of 2000. Each time, markets began to recover rapidly post-recession. For instance, following the 2008 financial crisis, the S&P 500 and the Nasdaq showed positive momentum by January 2009. Additionally, stocks started to rise a month after the coronavirus-related downturn in March 2000.
This pattern suggests that despite the prospect of slower growth and higher prices, the market may decline further, but recovery historically tends to follow quickly. A crash doesn’t imply long-term stagnation; in fact, indexes have always rebounded after downturns. Thus, current investment declines may not persist in the years to come.
Long-term investment in quality stocks is highlighted as crucial, ideally over at least five years, allowing time for recovery and growth amid market challenges. In the short term, investors with capital should consider buying shares of well-established leaders available at lower valuations, particularly within the tech sector. Maintaining and strengthening positions in dividend stocks could also provide passive income during challenging periods, which will be advantageous when market conditions improve.
During market crashes, maintaining composure and refraining from panic selling is essential. Despite historical patterns suggesting the possibility of further declines, they also indicate eventual improvement in the market.
