The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have vacillated wildly over the last month.
Though President Trump's tariff policy has been blamed for Wall Street's outsized volatility, it's far from the only catalyst.
A rare three-day stretch of bullish euphoria for the S&P 500 points to a clear directional move for Wall Street's broad-based index over the next year.
Compared to all other asset classes, nothing else comes close to matching the annualized return of stocks over the last century. But getting from Point A to B on Wall Street can often be a bumpy ride, as the last month has shown.
On Feb. 19, the iconic S&P 500(SNPINDEX: ^GSPC) hit its all-time closing high. Since then, the Dow Jones Industrial Average(DJINDICES: ^DJI) and S&P 500 have both dipped into correction territory, while the growth-oriented Nasdaq Composite(NASDAQINDEX: ^IXIC) dipped into a full-fledged bear market.
Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue »
While stock market corrections are common, what's made the month of April so special is the velocity of the swings we've witnessed in all three indexes. On April 9, the Dow, S&P 500, and Nasdaq Composite all recorded their largest single-session point gains in their respective histories. Meanwhile, the S&P 500 endured a 10.5% two-day drop from the closing bell on April 2 through April 4, which marked its fifth-worst two-day decline in 75 years.
Image source: Getty Images.
Vacillations of this magnitude are exceptionally rare -- and they often give way to unique investment opportunities.
Though the factors fanning the flames of volatility are unlikely to go away anytime soon, a rare feat completed by the benchmark S&P 500 last week should give investors ample reason to be excited about what's to come.
Headwinds are mounting for Wall Street
The interesting thing about stock market corrections, bear markets, and even crashes, is that there's rarely ever a single catalyst that can be pointed to for weighing down equities. While there is a primary scapegoat at the moment, a confluence of headwinds stands squarely in Wall Street's path.
The aforementioned "primary scapegoat" is none other than President Donald Trump's tariff policy. Roughly four weeks ago, on April 2, Trump rolled out his tariff plan, which includes a 10% global tariff, as well as higher "reciprocal tariff rates" on select countries that have historically run trade deficits with America. President Trump subsequently placed a 90-day pause on reciprocal tariffs for all countries except China on April 9 (i.e., the day that triggered the stock market's historic rally).
Superficially, tariffs provide a way for the U.S. to generate additional revenue and make American-manufactured goods more price competitive with those being imported into the country. But when examining the bigger picture, Trump's tariff policy comes with a couple of potential downside catalysts.
To begin with, the use of tariffs could hurt trade relations between the U.S. and its allies/key trade partners. It would not be a surprise if other countries retaliated with tariffs of their own, which would increase the cost of American goods in overseas markets.
Furthermore, the president's tariff plan might increase the prevailing rate of inflation. Adding a duty on imported goods used to manufacture products in the U.S. (known as an "input" tariff) can increase their cost and make them less price competitive.
This heightened tariff uncertainty comes at a time when the Atlanta Federal Reserve's GDPNow forecasting model is projecting the steepest decline in U.S. gross domestic product (GDP), sans the COVID-19 pandemic period, since the Great Recession. If the GDPNow estimate is accurate (as of April 24) and U.S. first-quarter GDP contracts by 2.5%, it would only be natural to expect corporate earnings growth to slow or shift into reverse.
Additional stock market headwinds include the S&P 500's historically pricey valuation and rapidly rising Treasury bond yields, the latter of which can make borrowing costlier.
Image source: Getty Images.
A rare feat for the S&P 500 should have investors seeing green
When downside volatility picks up and headwinds mount for Wall Street, it's normal for investors to seek out data points, predictive tools, and events that have previously correlated with moves higher or lower in the major stock indexes. Even though none of these tools or events can concretely guarantee what's going to happen next, some have exceptional track records of forecasting future stock returns.
Last week, the S&P 500 completed a feat that's been witnessed less than a dozen times over the last 75 years. However, this unique event has a knack for predicting what comes next for stocks.
On April 22, April 23, and April 24, Wall Street's widely followed index finished up by 2.51%, 1.67%, and 2.03%, respectively. It's the 11th time since 1950 that we've witnessed the S&P 500 gain at least 1.5% for three consecutive trading days.
But as you'll note in the social media post below from Carson Group's Chief Market Strategist Ryan Detrick, who also relied on data from Ned Davis Research, these rare periods of bullish euphoria for the S&P 500 have been a precursor to outsized gains over the next 12 months.
Following the 10 prior occurrences where the S&P 500 returned at least 1.5% in three consecutive sessions, the benchmark index was higher 100% of the time one year later.
Moreover, the S&P 500 wasn't just inching its way into the green in the 12 months following these unique three-day stretches of outsized optimism. The average one-year return for the S&P 500 following each occurrence is 21.6%, which is more than double the average annual return of 9.2% for the S&P 500 since 1950.
Though elevator-down moves in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite can tug on investors' heartstrings, historical data consistently shows that some of the best future returns occur within close proximity to periods of fear and uncertainty.
You'll note from Detrick's data set that these periods of bullishness occurred in the vicinity of the COVID-19 crash in 2020, the anti-austerity movements in 2011, the dot-com bubble of 2002, the Black Monday Crash of 1987, and the oil embargo of 1974, to name a few events.
When things look their most dire on Wall Street is often when the opportunity for investors to pounce is brightest. Even though we don't have any clarity on when tariff-related uncertainty will be resolved, history couldn't be clearer that short-lived fear and panic beget opportunity.
Should you invest $1,000 in S&P 500 Index right now?
Before you buy stock in S&P 500 Index, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and S&P 500 Index wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider whenNetflixmade this list on December 17, 2004... if you invested $1,000 at the time of our recommendation,you’d have $607,048!* Or when Nvidiamade this list on April 15, 2005... if you invested $1,000 at the time of our recommendation,you’d have $668,193!*
Now, it’s worth notingStock Advisor’s total average return is880% — a market-crushing outperformance compared to161%for the S&P 500. Don’t miss out on the latest top 10 list, available when you joinStock Advisor.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
