Stock indexes have been posting records recently -- but not the kind of records investors like. The S&P 500 on Friday delivered its worst performance since the start of the pandemic back in 2020. And both the S&P 500(SNPINDEX: ^GSPC) and the Nasdaq(NASDAQINDEX: ^IXIC) on March 31 completed their worst quarter since 2022. The Nasdaq even slipped into a bear market last week, represented by declines of at least 20% from its most recent high. Considering all of this, it's fair to say the market has crashed.
The reason for the turmoil? President Trump's tariffs on imports. Investors and analysts worry these duties will weigh on corporate and economic growth at home -- especially after the president broadened his initial tariff plan to include more countries and deeper levels of taxation. Now, the question is: After this market crash, what happens next? History offers us a strikingly clear answer.
Image source: Getty Images.
What's a market crash?
First, it's important to note that there isn't a specific percentage drop that signals a market crash, but generally, investors start speaking of a crash when indexes decline by more than 10% pretty quickly -- and that's the case right now. The Nasdaq has slipped about 10% over the past week, the S&P 500 and the Dow Jones Industrial Average are close behind.
As mentioned, investors are concerned about the impact of Trump's tariffs, levies on imports of most items from countries around the world. Since U.S. companies -- in particular high-growth tech players -- import raw materials and finished goods, they will have to pay these tariffs and that represents higher costs for them. They can either absorb these costs or pass them along to the consumer. In either situation, this is likely to weigh on earnings with results being greater expenses or fewer customers.
Now, to understand what might happen after this new crash, let's consider other periods of high costs for companies such as inflation and U.S. recessions. Past periods of higher inflation -- such as the early 1990s and more recently 2022 -- resulted in declines in the S&P 500, but the market didn't crash. In fact, in both periods, the index went on to gain rather quickly as inflation came down.
However, market crashes have occurred around past recessionary periods -- from the dot-com bubble in 2000 to the financial crisis of 2008 and the coronavirus crash of 2000. The shaded areas in the chart below show periods of recession.
And here, what's compelling is the market, following each recession period, has quickly started to track higher. This is particularly the case following the past two recessions. Following the 2008 financial crisis, the S&P 500 and the Nasdaq gained positive momentum as of January 2009. And after the coronavirus crash and recession in March of 2000, stocks began to climb a month later.
All of this suggests that, amid potentially slower growth and higher prices or concern about such issues, the market today may fall further -- but history shows us recovery might be right around the corner. So, a crash doesn't necessarily mean the stock market will remain in the doldrums for a long period of time. And here's another silver lining in the dark cloud: After every downturn and crash in the past, indexes always have rebounded and gone on to advance. This means that even if your investments are tumbling now, this won't necessarily be the situation a few years down the road.
And this highlights the importance of choosing quality stocks and committing to them for the long term -- by this, I mean a period of at least five years. A lot can change over that time, offering today's down-and-out players the opportunity to manage the troubles and position themselves for a potential win over time.
What should investors do now?
So, while you're waiting for all of this to play out, what should you do? If you have the cash to invest, consider buying shares of well-established leaders that are trading at dirt-cheap levels today. You'll find them throughout industries, but they're particularly evident in the tech sector right now. At the same time, reinforce positions in dividend stocks as they'll offer you much-appreciated passive income during this difficult period -- and you'll love the extra income even as the market situation brightens.
Finally, during this market crash, keep a cool head and don't panic sell. Remember that the market has crashed many times and never has remained down for excessively long periods. Though history shows us that today's headwinds may lead to more declines, importantly, it also shows us that better times are on the horizon.
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Adria Cimino 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.
