The stock market has been a tumultuous place in recent weeks, with the three major benchmarks taking investors on a roller-coaster ride. The S&P 500 index (SNPINDEX: ^GSPC), the Dow Jones Industrial Average, and the Nasdaq Composite fell -- with the Nasdaq crashing into bear territory -- earlier this month as President Donald Trump set out a plan for tariffs on imports. The concern is tariffs will lift prices for U.S. companies and consumers, weighing on growth.
The Trump administration later put the tariff plan on hold for 90 days in order to negotiate with various countries. China remains the exception, with that country facing a 145% tariff from the U.S. And Trump offered makers of electronics products such as smartphones and chips a break in the form of a temporary exemption from import tariffs. This news boosted indexes, helping them rebound from lows, but they still remain down since the start of the year.
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And with each bit of news regarding tariffs and their expected impact on the economy, indexes have shifted direction. All of this makes it very difficult for investors to determine whether stocks are heading for brighter days or more declines. During times like these, it's important to remember that similar moments have unfolded before, and while the past is no guarantee of what will happen, we can look to them for clues about the future. In fact, 150 years of history says one particular thing happens next.
Image source: Getty Images.
Downturns, crashes, and recessions
Market downturns, crashes, recessions, and other unfavorable periods aren't new to the investing landscape. Certain big events like the 1929 crash or many decades later Black Monday in 1987 might stand out in investors' minds and the history books, but other difficult times before, after, and in between also have helped construct the market's story over the years.
In fact, Morningstar research looks all the way back to the 1870s and says that a dollar invested then in a hypothetical U.S. stock index would today be worth more than $28,000 -- even after going through 19 market crashes.
We can use that data as well as performance of the S&P 500 since the late 1950s -- when the index took its current form with 500 companies -- to consider what might be ahead following the current market turmoil. The chart, below, shows the index's performance over time; the shaded areas represent U.S. recessions. As we can see, the market always went on to recover from difficult periods and climb.
Now if we zoom in closer, looking at the next chart, we can see that the index has become even more resilient in recent times -- recovering more quickly from the past two recession periods than it did following the slowdown in 2001.
These charts show only recessions, but it's important to note that market crashes and downturns also took place -- for example the financial crisis in 2008 and the coronavirus crash in 2020.
Looking ahead
We aren't officially in a recession today -- you never know you're in a recession until well after it's started as the common definition is two quarters in a row of economic contraction -- but economists have sounded the alarm recently. They've cited data such as weakening consumer sentiment along with the potential for higher prices due to import tariffs as the reason behind their concerns. The International Monetary Fund even lowered its forecast for U.S. growth this year by almost one percentage point to 1.8% due to the tariff situation. Whether a recession forms or not, it's clear we're in a difficult moment.
Now, let's consider what our look at history tells us about what may happen next. Market downturns, recessions, and crashes vary in length and intensity. But one thing is certain: Following each of these events, the market has recovered and gone on to reward long-term investors. I expect that will be the case this time, too.
What does this mean for us as investors? Now is a great time to take advantage of bargains on quality stocks. Many top names have fallen but still offer solid long-term prospects. And it's also a good time to hold onto stocks we already own as strong companies are likely to manage the current headwinds and excel over the long run.
So, what history tells us is, during stock market turmoil, remember to maintain a long-term view. Through this lens, there's reason to be optimistic about what's ahead and confident in staying invested.
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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.
