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The S&P 500 (SNPINDEX: ^GSPC) closed at a record high of 6,144 on Feb. 19. But the benchmark index has since declined more than 5%. Concerns about how trade policy will impact the already shaky U.S. economy have factored heavily into that rapid drawdown.
President Donald Trump's tariffs on Canada and Mexico took effect this morning, with a new levy on China added to the one that took effect in February. Trump has also threatened to impose tariffs on the European Union. Importantly, every country impacted has either retaliated or plans to retaliate with their own tariffs, touching off a trade war.
History offers two conflicting opinions about what happens next in the stock market. Here's what investors should know.
While the S&P 500 could stage a rapid rebound in the coming months ...
In the past four decades, the S&P 500 has frequently recorded intra-year drawdowns of at least 5%. However, the declines were typically brief. Research published last year by Goldman Sachs said, "We find that 5% pullbacks have historically been good entry points, as the index has gone on to provide a median 6% return over the subsequent three months, with positive returns in 84% of episodes."
In short, history says the S&P 500 may rebound sharply in the coming months, in which case the present is theoretically an excellent time to buy stocks.
But past performance may not be indicative of future results in this scenario. The strong U.S. economy Trump inherited less than two months ago is now starting to crack under the weight of inflation and tariffs.
... Tariffs could also be big trouble for the stock market, at least temporarily
Consumer spending unexpectedly tumbled 0.2% in January, the first month-on-month decline in nearly two years and the largest decline in four years. Also, consumer confidence fell 7 percentage points in February, the worst month-on-month deterioration in more than three years, according to the Conference Board.
Those disappointing consumer data points hint at trouble for the U.S. economy. Consumer spending accounts for about two-thirds of gross domestic product (GDP), meaning it is the primary driver of economic growth. Given the present weakness, advanced estimates suggest first-quarter GDP is on pace to decline an annual rate of 2.8%, the sharpest decline since the second quarter of 2020.
Consumers are concerned for two reasons. First, inflation as measured by the Consumer Price Index (CPI) has accelerated in four straight months. Second, tariffs recently imposed by President Trump will almost certainly make inflation worse. That's because businesses typically past the cost increases associated with tariffs along to buyers.