The markets got slammed last week as President Donald Trump announced his tariff plans, which sent global governments rushing to respond, and the turmoil is not letting up. There's fear of a trade war and a recession, and fear doesn't usually play out well for the markets.
Investors are fleeing to safer holdings, but is that the right way to go? On the one hand, investors could be in for some dark company forecasts as businesses deal with a potential new reality. On the other hand, low prices mean great deals.
History offers a clear answer. Let's see what it is.
Why are investors spooked?
Let's first understand what's happening. President Trump has raised tariffs globally using a tit-for-tat type of formula for each country individually. He has said that the U.S. has been at a disadvantage vis-a-vis its trading partners, and raising tariffs puts the system back in the proper balance.
His administration expects this to boost the U.S. economy because it should drive consumers to buy more U.S.-made goods. However, analysts don't necessarily see that happening. The U.S. economy has been strong despite fears of a recession over the past few years, and the Federal Reserve has been carefully lowering interest rates to fight inflation without triggering a recession. The job market is strong, and the gross domestic product (GDP) has been growing at around 3% annually over the past few years.
With the new tariff program, consumers might cut back spending, bringing down GDP growth and severely impacting company financial statements. In the near term, company sales growth could slow, and earnings could decline. Further along, it could become harder for companies to boost business. After the "Liberation Day" announcements, analysts at JPMorgan Chase lifted their recession outlook from 40% to 60%.
What's happened in the past
There have been 15 recessions in the past century, starting with the Great Depression in 1929. According to the National Bureau of Economic Research, they've lasted about 10 months on average since World War II. Although the technical definition of a recession includes two quarters of consecutive GDP contraction, the shortest recession was only two months long, when COVID-19 first hit the world.
By contrast, the longest recession since World War II was 18 months. That could be a very uncomfortable time, but in the scheme of things, it's a relatively short period. Selling stocks because companies will feel pressure for that amount of time and feel its after-effects seems quite shortsighted.
In all of these cases, the market has gone on to rebound and reach much higher levels. Since the end of the most recent recession, the S&P 500 has nearly doubled, and that includes its recent drop.
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How you should play this
If you still have a long time horizon, these events shouldn't ruffle your feathers. The market has been here before, and it's always bounced back. Every investor should expect recessions, corrections, bear markets, and crashes over their investing lifetime.
If you are in or nearing retirement, you should have a well-diversified portfolio focused on safe and income-producing stocks that are less likely to be negatively impacted during these kinds of events. In fact, many of the safe and secure stocks are doing fabulously right now. If you are getting close to retirement and you don't have this kind of setup, you should make some changes to your portfolio.
One thing all investors shouldn't do is panic sell. Sure, it makes headlines to say that $6 trillion in market value has disappeared in a matter of days. But if you haven't sold your stocks, those losses weren't realized for you. If you keep holding on, they likely won't be. While you should expect unpleasant market moves over time, the vast majority of the time the market does do well, and if you stay in your position, it should reverse in due time.
One thing investors should do is spot bargains and buy. These are the kinds of buying opportunities savvy investors wait for when times are good. There are great deals on excellent stocks all over the place, but they won't last forever. As long as you can hold for the long term, you can use this market as an opportunity to buy on the dip.
