There is an old Chinese curse that warns, “May you live in interesting times.” It’s certainly an apt quote for the times we are living in now, as the Trump administration seems determined to remake the U.S. economy through the use of tariffs — perhaps leading to a trade war with China.
After “Liberation Day” (April 2), in which President Donald Trump unveiled tariff rates far higher than virtually all investors suspected, the S&P 500 (^GSPC 0.13%)Â experienced a whopping 10.5% plunge.
That’s the fourth-worst two-day plunge in the past 75 years. Not only that, the April downdraft came after the market had already been on a downward trajectory since mid-February.
The good news for investors? History suggests that this is likely a great time for long-term-oriented investors to buy.
History says buy…if you’re time frame is a year or more
According to Stansberry Research, the April 3-4 tumble is the fourth-worst two-day stretch in the market since 1950. Looking at the other top 10 two-day plunges, all occurred at the outset of genuine crises — the 1987 “Black Monday” plunge, the Great Financial Crisis of 2008, and the outbreak of COVID-19 in 2020:
Image source: Stansberry Research.
As you can see, following these two-day plunges, stocks exhibited mixed performance one, three, and even six months later, with positive average returns but also with a very wide skew. In fact, even after the two-day plunge that ended on Oct. 7, 2008, the market was 17.2% lower six months later.
However, when one looks out a year beyond these 10 other instances, the average return is a whopping 27.2%, with every single instance in the green and the biggest one-year recovery at 59.2%. Look two years out, and the average return is 40.4%, with gains as high as 69.5%.
Howard Marks, Warren Buffett, and other big investors all say the same thing: Buy
Warren Buffett is famous for the quip, “Be fearful when others are greedy and be greedy when others are fearful.” Certainly, if the history of nauseating two-day drops is any guide, Buffett has historically been right on all counts.
But it’s not just Buffett who has long touted the virtues of buying when others are selling and selling when everyone wants to buy. Buffett peer and Oaktree Capital founder Howard Marks, also a storied value investor, summed up the case nicely in his recent investment memo titled Nobody Knows (Yet Again).
In that memo, Marks notes how Oaktree went ahead and bought into both the 2008 financial crisis and the COVID-19 crisis, despite being highly uncertain about the future, unsure whether there would be further downside, and having no idea how or when the crises would end. All he knew was that financial assets were now heavily discounted.
The reason Marks takes a price-and-valuation-based approach and not one based on trying to game out future events is that:
We can’t confidently predict the end of the world; we’d have no idea what to do if we knew the world would end; the things we’d do to gird for the end of the world would be disastrous if it didn’t end; and most of the time the world doesn’t end.
Buffett and Marks are, of course, not the first to espouse contrarian investing. After all, the phrase “Buy when there is blood in the streets” is attributed to 18th-century British nobleman Baron Rothschild, who coined the term after he bought into the panic following the Battle of Waterloo, which ultimately yielded him a fortune.
But there’s also a case against buying today
Certainly, a lot of history suggests that buying into this market, while perhaps risky in the near term, is nearly certain to pay off in the long term. However, there are a couple of counter-narratives investors should be aware of that could make this time different.
First, the market is more expensive today than it was after those prior crashes. After the 1987 crash and the 2008 crash, the S&P 500 price-to-earnings (P/E) ratio was in the low- to mid-teens. In March 2020, the valuation was higher, in the low 20s. Today, the S&P 500 is around 26.9 times earnings.
While it’s true that the average valuation of the market has been pushed up by the rise of the highly valued and heavily weighted “Magnificent Seven” stocks in recent years, the higher valuation on a historical basis means investors might not enjoy such historically robust post-drop returns from here.
Second, the implementation of tariffs, unlike these other instances, risks pushing up inflation, which may tie the hands of the Federal Reserve. Remember, the Fed responded to Black Monday, the 2008 Financial Crisis, and the COVID crisis by lowering interest rates. The Fed even went so far as to cut the Federal Funds rate to zero in 2008 and 2020 while also purchasing longer-term U.S. Treasuries, which kept rates low to stimulate the economy.
In recent days, various Fed officials have stated publicly that since tariff policies could drive up inflation, the Federal Reserve may be more limited in its ability to provide monetary stimulus this time. And whereas the Federal government in 2008 and 2020 was doing everything it could to help the situation, today the problem has actually been caused by the government, at least the Executive branch, which is still in the beginning of its four-year term.
But don’t be paralyzed; stick with your plans
So, for all these reasons, it’s quite possible that the market could experience further downside from here. On the other hand, the current administration also has more ability to rectify the situation than the administrations during those other market downturns, since it’s also the entity that ignited this particular market crash in the first place.
All in all, if you do have investable dollars and engage in regular stock buys or 401(k) or IRA contributions, there’s no reason not to invest today as long as it’s within your financial plan and risk tolerance. As history has shown, times of great uncertainty are often the very best times to purchase stocks.
That said, the differences between the current crisis and 1987, 2008, and 2020 keep this investor somewhat cautious. Therefore, investors may want to think twice before committing heavily to stock-buying and/or using leverage to do so.
