Since the moment President Trump pulled out his tariff charts in the White House Rose Garden last Wednesday, stock markets around the world have been plummeting. The 11 percent loss in the broad S&P 500 market index on Thursday and Friday was the one of the largest two-day losses in the index in the past 100 years.
Crashes do happen every few years. Stock markets are often volatile and most downturns are forgotten by the next upturn.
In just a few days in 1987, for example, the Black Monday crash and associated turmoil sent stocks down more than 30 percent. But the markets turned around within a few months, erased the losses in less than two years, and kicked off one of the longest bull markets in history, according to research published by analyst firm Morningstar.
Some crashes are more serious. Starting in 2000, market losses from the dot-com crash combined with the global financial crisis in 2008-09 took 13 years to erase.
So before you assume the current crash will be quickly forgotten and investors dive back in to “buy the dip,” here are three considerations to help understand the current market.
Consider the source
Most crashes are caused by external events beyond the control of investors, companies, and regulators. The Great Depression, world wars, and pandemics such as COVID-19 harmed society and the economy in ways that no one could avoid or quickly fix.
The current mess is different, with the downturn caused by Trump’s single, wide-reaching policy change on trade and the repercussions it spawned.
The overriding impact of the trade policy change on the market was made clear on Monday morning when a wire service headline reported the White House might implement a 90-day pause in tariffs. The stock market immediately shot up, erasing hundreds of billions of dollars of losses. Moments later, the administration denied the story and the market resumed its decline.
That instantaneous media-and-misinformation environment makes this crash particularly volatile and difficult to forecast, as investors try to guess what, if anything, might change the president’s mind.
What’s happening in the economy
The causes of the 1987 stock market crash remain a matter of debate, but there was no major economic problem at the time. Similarly, the market dropped sharply amid the Cuban Missile crisis in 1961 but quickly recovered when the crisis passed.
But when the stock market’s problems relate to economic problems, the downturns tend to be more substantial. Stagflation in the 1970s — high inflation and unemployment, low economic growth — led to a 52 percent market decline that took almost 10 years to recover.
This time around, the economy appeared sturdy before Trump’s new tariffs, but it may be less so now.
The US economy grew almost 3 percent last year, inflation declined, and unemployment remained around 4 percent. Economists were expecting the Federal Reserve would start lowering interest rates, which, combined with tax cuts from the Trump administration, could fuel further growth.
Now those expectations have been upended.
Analysts at Goldman Sachs noted that the tariffs are higher than expected, created uncertainty causing consumers and businesses to spend less, and have drawn reactions from other countries placing tariffs on US exports. “Our new analysis of the economic effects of uncertainty suggests substantially more downside,” the analysts wrote in a report on Sunday. They put the odds of a recession in the next year at 45 percent, up from 20 percent two weeks ago.
It’s always a bull market somewhere
This common Wall Street refrain is born out of experience with past crashes.
In the dot-com crash, stocks of gold and other commodity producers were a haven.
In the current market, the crash has been broad, with everything from tech stocks to retailers and energy producers getting hit. A few stocks that benefit when the economy weakens, such as low-price retailer Dollar General, have gained.
Longtime tech analyst Dan Ives at brokerage firm Wedbush said cybersecurity companies such as Palo Alto Networks and CrowdStrike could outperform, though the stocks have traded down so far.
“Investors today are coming to the scary realization this economic Armageddon Trump tariff policy is really going to be implemented this week and it makes the tech investing landscape the most difficult I have seen in 25 years covering tech stocks on the Street,” Ives wrote in a report on Monday. “Today will be a scary day.”
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