Stock indexes have recently experienced significant declines, with the S&P 500 recording its worst performance since the onset of the pandemic in 2020. Both the S&P 500 (^GSPC 0.18%) and the Nasdaq (^IXIC 0.18%) saw their worst quarter since 2022, with the Nasdaq entering a bear market last week due to declines exceeding 20% from its recent peak. The turmoil is attributed to tariffs imposed by President Trump on imports, which investors and analysts fear could hinder corporate and economic growth domestically.
A market crash is generally defined as a rapid decline exceeding 10% in major indexes. The Nasdaq has dropped approximately 10% over the past week, while the S&P 500 and Dow Jones Industrial Average are closely following suit. These tariffs, affecting imports from various countries, increase costs for U.S. companies, particularly high-growth tech firms, which import raw materials and finished goods. Companies face the choice of absorbing these costs or passing them on to consumers, both scenarios likely impacting earnings negatively.
Historical data shows that while periods of high costs, such as inflation, have led to market declines, they haven’t always resulted in crashes. For instance, the S&P 500 recovered quickly following inflationary periods in the early 1990s and 2022. Conversely, market crashes have often coincided with recessions, such as the dot-com bubble in 2000, the financial crisis of 2008, and the coronavirus crash in 2020. Following these recessions, markets have typically rebounded swiftly.
This suggests that while the current market may experience further declines amid concerns of slower growth and higher prices, history indicates recovery may be imminent. Investors are encouraged to focus on quality stocks and maintain long-term commitments, ideally for at least five years. During this period, established companies trading at discounted levels, especially in the tech sector, present opportunities. Additionally, reinforcing positions in dividend stocks can provide passive income during challenging times.
Investors should remain calm and avoid panic selling, remembering that markets have historically recovered from crashes. While further declines may occur, better times are likely ahead. — new from The Motley Fool