For more than a century, the stock market has been making patient investors notably richer. However, there's a cost of admission that comes with putting your money to work on Wall Street... and it's called volatility.
Following more than two years of nearly uninterrupted optimism, the mature-stock-driven Dow Jones Industrial Average (DJINDICES: ^DJI), widely followed S&P 500 (SNPINDEX: ^GSPC), and growth-focused Nasdaq Composite (NASDAQINDEX: ^IXIC) have hit the skids. Since the S&P 500 hit its all-time closing high on Feb. 19, we've witnessed the Dow Jones, S&P 500, and Nasdaq Composite respectively lose 12.3%, 14%, and 18.8% of their value (as of the closing bell on April 17).
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Relative to their all-time highs, the Dow and S&P 500 are firmly in correction territory. Meanwhile, the Nasdaq Composite's tumble, as of April 8, placed the index in its first bear market since 2022.
Image source: Getty Images.
It's been an especially rough start to the year for the S&P 500. Specifically, it's the index's fifth-worst start, through April 18 (73 trading days), since 1928 -- a decline of 10.2%.
While fear and uncertainty often abound during elevator-like downturns in equities, previous double-digit percentage declines in the S&P 500 to begin a year have correctly predicted the next directional move for stocks 100% of the time.
Before diving headfirst into this correlation which has, for 98 years, accurately predicted what's to come for the S&P 500, it's important to understand which catalysts are weighing down equities, as well as recognize that these headwinds are unlikely to disappear overnight.
No stock market headwind is creating more of a stir than President Donald Trump's tariff announcements. On April 2, which was referred to as "Liberation Day" by Trump, the president introduced a global tariff of 10%, along with higher "reciprocal tariffs" on select countries that have historically run trade deficits with the U.S.
President Trump believes tariffs will raise revenue for the U.S., encourage companies to manufacture their products domestically, and help American-made goods stay price-competitive with those being imported from overseas markets.
But there's a laundry list of unknowns that come with Trump's tariff policy. There's the potential for worsening trade relations, a possible surge in the prevailing rate of inflation in the U.S., and the chance of slower economic growth.
In particular, four New York Fed economists at Liberty Street Economics analyzed how Trump's China tariffs in 2018-2019 impacted the future outcomes of businesses that had direct exposure to these added duties. Liberty Street Economics showed that, on average, profits, sales, employment, and labor productivity all fell from 2019 to 2021 for businesses exposed to Trump's tariffs on China.
On top of tariff uncertainty, the stock market entered 2025 at one of its priciest valuations in history.
S&P 500 Shiller CAPE Ratio data by YCharts.
Though value is a subjective term that's going to vary from one investor to another, the S&P 500's Shiller price-to-earnings (P/E) ratio, which is also referred to as the cyclically adjusted P/E Ratio (CAPE Ratio), makes crystal clear that stocks are historically expensive.
In December 2024, the Shiller P/E ratio approached 39, which marked its third-highest reading during a continuous bull market, when back-tested 154 years. The only two times stocks have been pricier were prior to the bursting of the dot-com bubble in December 1999, and during the first week of January 2022 (i.e., just before the 2022 bear market took shape).
Extended stock valuations aren't going to resolve themselves quickly. Either company valuations need to come down and/or corporate earnings need to climb such that stock valuations become more palatable. Throughout history, Shiller P/E readings north of 30 have eventually been followed by 20% (or greater) declines in the Dow, S&P 500, and/or Nasdaq Composite.
Other catalysts leading to fear, uncertainty, and historic volatility for stocks include the Atlanta Federal Reserve forecasting a contraction in U.S. gross domestic product for the first quarter, as well as rapidly rising Treasury bond yields, which suggest borrowing will become costlier.
Image source: Getty Images.
Although the past can't predict the future, with an encompassing view of what's caused the S&P 500 to plunge by 10.2% since 2025 began, let's take a closer look at how the index has previously performed the remainder of the year following disappointing starts.
Based on data aggregated by Creative Planning Chief Market Strategist Charlie Bilello, the S&P 500's 20 worst starts to a year, through 73 trading days, have ranged from a loss of 4.7% to 24.6%. Not including the current 10.2% downturn, the S&P 500 increased in value 58% of the time from trading day 74 through the end of the year following these other 19 poor starts.
But there's an interesting variance to Bilello's data set once the S&P 500's losses through 73 trading days exceeds 10%.
As you'll note below, there have been only five instances in 98 years where the benchmark index lost 10% or more through 73 trading days (1932, 1939, 2020, 1942, and 2025). For the remainder of the year, the S&P 500 was higher 100% of the time. Whereas the S&P 500 has historically averaged a 10% annual return over the long run, the four years that started worse than 2025 produced an average return of 22.8% from trading day 74 through the end of the year. Without fail so far, poor starts to a year have represented phenomenal buying opportunities for investors.
The S&P 500 is down 10% in the first 73 trading days of 2025, the 5th worst start to a year in history. $SPX
-- Charlie Bilello (@charliebilello) April 19, 2025
Video: https://t.co/bOI6drdCEz pic.twitter.com/rpWFyQ206y
Although this data is looking at a relatively narrow time frame, it's consistent with what larger-scale analyses have shown to expect from downturns in Wall Street's broad-based index.
For instance, the researchers at Bespoke Investment Group compared the calendar-day length of every S&P 500 bull and bear market from the beginning of the Great Depression in September 1929 to June 2023. What they uncovered was a wide gap between optimism and pessimism on Wall Street.
Of the 27 S&P 500 bear markets in nearly 94 years, the average 20% or greater downturn lasted just 286 calendar days (about 9.5 months). In comparison, the average bull market endured for 1,011 calendar days, or approximately two years and nine months. Being an optimist has been a considerably smarter decision.
The analysts at Crestmont Research came to a similar conclusion. Crestmont calculated the rolling 20-year total returns, including dividends, for the S&P 500 dating back to the start of the 20th century. This produced 106 separate 20-year periods (1900-1919, 1901-1920, and so on, to 2005-2024).
What Crestmont Research's calculations show is that all 106 rolling 20-year periods produced a positive annualized total return. Regardless of whether an investor puts their money to work at a market top or bottom, during a war, recession, or pandemic, they would have (hypothetically) made money every single time, as long as they held their position for 20 years.
Patience is a virtue and a path to wealth creation on Wall Street, based on what the historical data tells us.
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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.