The Stock Market Crashed When President Trump Announced Tariffs. History Is Crystal Clear About What Happens Next.

The S&P 500 (SNPINDEX: ^GSPC) crashed when President Donald Trump announced a surprisingly severe slate of tariffs on April 2, a date he dubbed "Liberation Day." Five trading days later, the index had declined 19% from its high as economists raised their recession-probability forecasts and investors sold U.S. stocks at a historic pace.

While the near-term outlook is mixed, history is crystal clear about what will happen in the long run. Here's what investors should know.

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History sends mixed signals about what the S&P 500 will do in the near term

The S&P 500 is widely regarded as the best benchmark for the U.S. stock market. Since its inception in 1957, the index has suffered 32 corrections, meaning it has declined at least 10% from its record high 32 times. But recoveries have historically been swift.

The S&P 500 has gained an average of 12% during the 12-month period following its first close in correction territory, according to UBS Wealth Management. In the present situation, the index first closed in correction territory when it sank to 5,522 on March 13. So if its performance aligns with the historical average, the S&P 500 should advance 12% to 6,185 during the next year.

Of course, drawing conclusions from past stock-market corrections is somewhat complicated by the tariffs imposed by President Trump, which have raised the average tax on U.S. imports to 11.5%, according to the Tax Foundation. That's an increase of 9 percentage points compared to last year, and the highest level since 1943.

There's little historical precedent to inform decision-making, but much smaller increases in the effective tariff rate have coincided with more substantial stock-market crashes in the past. The average tax on U.S. imports increased 1.5 percentage points between 1957 and 1965, and the S&P 500 suffered a 21% decline and a 28% decline during that period.

Additionally, tariffs imposed by the Trump administration were engineered to eliminate U.S. trade deficits with foreign countries. But the trade deficit has contracted sharply four times since 1990, and the results have usually been devastating. The U.S. economy slipped into a recession in three of those four periods, and the S&P 500 declined by an average of 41%.

Image source: Official White House Photo by Joyce N. Boghosian.

History says the S&P 500 will eventually recoup its losses and soar to new highs

Bear in mind that every correction is unique. In this situation, stocks have declined because investors are concerned the radical shift in U.S. trade policy will drive the economy into recession. But the real problem is a lack of clarity: The market hates nothing so much as uncertainty.

The 10% universal tariff President Trump announced on April 2 is currently in effect, but the country-specific reciprocal tariffs have been delayed for 90 days while his administration negotiates with other countries. That leaves businesses in a difficult position. They cannot make prudent spending decisions without knowing which tariffs will apply to which countries, and which goods (if any) will be exempt.

Consequently, stocks will likely be range-bound until those variables are known, at which point investors will reassess the situation. The S&P 500 could rocket higher once the 90-day pause expires. Indeed, UBS Wealth Management recently wrote: "Once we receive policy clarity, stocks are likely to recover." But the opposite could happen if investors are concerned about the finalized tariff rates.

Predicting when the stock market will recover is impossible. But investors should focus on one indisputable fact: While the S&P 500 has suffered 32 market corrections since 1957 (10 of which became bear markets), the index has also rebounded from every drawdown and achieved a total annual return above 10%. That period encompasses such a broad range of economic conditions that similar returns are likely in the future.

In short, history is crystal clear about what happens next: The stock market will eventually recoup its losses and reach new highs. That means the present situation is a good opportunity for patient investors to buy stocks.

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Trevor Jennewine 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.