The S&P 500 Just Did Something Seen Only 5 Times in 80 Years. Here's What History Says Happens Next.

Perhaps you’ve heard the saying “stocks take the stairs up and the elevator down.” That’s ringing very true right now after a huge sell-off in the stock market fueled by U.S. President Donald Trump’s latest round of tariffs.

The S&P 500 (^GSPC -0.23%) fell 17.6% from its mid-February high through Monday’s close. The Nasdaq Composite and Russell 2000 have already fallen more than the requisite 20% to declare a bear market, as tech stocks and small-cap stocks have been hit harder by the proposed tariffs.

While bear markets — where the major indexes drop more than 20% — are fairly common, the S&P 500 recently did something for just the fifth time in the last 80 years. Each of the previous four times saw the same reaction from investors, and it could signal a big move in the stock market going forward.

Two days that will go down in history

President Trump announced a vast new slate of tariffs on April 2. By the closing bell on April 4, the S&P 500 declined a total of 10.5%. There are only four two-day periods in the last 80 years where the index fell as much or more.

Data source: YCharts.

When stocks go down in value, it’s usually the result of a catalyst that triggers investors to sell them in favor of safer assets. That’s why the saying that stocks take the elevator down holds, because the reaction to the catalyst can be swift. But rarely is it this swift.

Note that Black Monday of 1987 (when the index fell more than 20% in a single day) is responsible for two of the five biggest two-day drops. The index actually climbed on the next trading day, but the two-day loss still exceeded any other two-day period aside from its immediate predecessor. The global financial crisis in 2008 and the rise of COVID-19 in 2020 were the cause of the other two big drops.

Trump’s latest tariffs exceeded anyone’s expectations, heightening uncertainty about how other countries would respond. It’s the latter that’s truly driving stocks lower. If there’s one thing financial markets hate, it’s uncertainty.

That’s a theme throughout all the above situations. In 1987, investors feared a return to stagflation. In 2008, the entire financial system was at risk of going into bankruptcy as the subprime mortgage bubble popped. And in 2020, investors had no idea what the ramifications of COVID-19 shutdowns would be as millions of people were suddenly out of work.

History shows that another big move is coming for stocks

While the catalysts behind each of the above stock market crashes might be different, there are a couple of things that remain the same. As mentioned, the market’s heightened uncertainty pushed stocks lower extremely quickly. On top of that, the index, for the most part, bounced back quickly in each instance. The chart below shows the one-month returns of the S&P 500 for each big drop.

Data source: YCharts.

Analysts at Truist broadened the scope of the worst two-day price moves. They found 10 two-day periods, mostly based around the 2008 financial crisis, where the S&P 500 dropped at least 8.7%. It’s worth pointing out that stocks didn’t always immediately rebound in price after such rapid declines. 2008 saw big moves lower in the stock market throughout October and November. Even the early decline in stocks in 2020 was just a precursor of what was to come in mid-March.

However, every two-day period where the S&P 500 declined 8.7% or more was followed by a positive return over the next one-year period. Even if you bought shares just after the big market drop in early October 2008, you came out ahead by 6.2% a year later.

On average, the S&P 500 improved 27.2% over the next year after a massive two-day sell off. That’s well above the historical average of the index, which sits at around 10% per year.

That’s a testament to the resilience of the stock market. Investors shouldn’t be afraid to buy into stocks after such a steep decline.

How to invest right now

Investors should take solace in the fact that the S&P 500 has always bounced back from historical drops like the one we just saw. Sometimes it takes a while, but often, it happens quickly. As such, investors shouldn’t hesitate to add to their portfolios right now.

That could be as simple as buying shares of an S&P 500 index fund. The Vanguard S&P 500 ETF (VOO -0.48%) is a great option for investors who don’t want to research individual companies and assess their stock valuations. It has a strong record of tracking the S&P 500 closely, and it charges an expense ratio of just 0.03%.

Investors who like to pick individual stocks should do so with a heightened level of caution. While the market as a whole tends to bounce back quickly, some businesses face significantly higher risks from U.S. trade policies, how other countries respond to those policies, and the potential risk of a recession stemming from those policies. With so many unknowns about how the current situation will play out, investors should demand a greater margin of safety on their individual stock investments.

A margin of safety is the gap between a stock’s intrinsic value based on your analysis and the current share price at which you can buy it. At this point, it’s a lot harder to be certain of most stocks’ intrinsic value. But if you require a greater margin of safety, you can be off in your valuation and still come out ahead.

If you invest in high-quality businesses and maintain a long-term outlook, the market is presenting you with an opportunity right now that you don’t want to miss.