Impact Market Update: Tariffs, Market Corrections, and Worst-Case Scenarios

On Thursday, April 3rd and Friday, April 4th, the U.S. stock market had two of its worst days since the COVID bear market back in 2020. The S&P 500 dropped nearly 11% in just 48 hours. What made it even more frustrating is that the drop was mostly self-inflicted — driven by sweeping tariffs that were announced and set to take effect right away.

As you can imagine, I’ve been hearing from a number of concerned clients lately.

A few questions keep coming up that really capture the current anxiety: “What if we’re headed for another Great Depression like the 1930s, or a financial crisis like 2008? What would that mean for me? And what if I’m nearing retirement — or already there? What should I be doing right now?”

The first thing you should do is take a deep breath. The good news is that markets have recovered 100% of the time, including during the Great Depression. However, the timing of that recovery depends on how well diversified you are and the level of risk in your portfolio.

Let me be clear. I don’t believe we’re heading into another Great Depression. In fact, I’d rank this situation well below both the 2008 financial crisis and the COVID downturn in 2020. Why? Because unlike those, this one feels largely self-inflicted, a manufactured issue stemming from recent policy decisions.

But let’s say we look at the worst-case scenario. During the market crash of 1929 and the Great Depression that followed, an investor with 100 percent of their portfolio in U.S. stocks would have waited about 25 years just to break even. That sounds scary, I know, but investors with more diversified portfolios fared much better.

For example, someone with a 60/40 mix of stocks and bonds would have recovered in about 5 years, thanks to the stability that bonds provided during the downturn. And an investor with a portfolio similar to our aggressive diversified allocation, spread across asset classes like cash, international stocks, real estate, domestic equities, and gold, would have seen a full recovery in around 8 years.

Keep in mind, this was the most extreme financial crisis of the past century.

One of the key advantages we have today compared to the 1920s and 30s is the presence of a strong Federal Reserve with the ability to manage monetary policy. If the economy starts to stumble, the Fed can step in by lowering interest rates and injecting liquidity into the system. This kind of action often has a powerful, positive effect on the stock market.

To put things in perspective, here are the recovery times from the last four major bear markets we’ve experienced over the past 25 years.

60/40 portfolio is 60% stocks and 40% bonds while the diversified aggressive allocation is 97% stocks and 3% bonds.

In 2008, we faced the Great Recession and a full-blown financial crisis. The global banking system was on the brink of collapse, and U.S. stocks dropped roughly 55 percent from peak to trough. If you were invested solely in the S&P 500, it took about six years to recover on an inflation-adjusted basis. However, a well-balanced 60/40 portfolio recovered in about two years, especially if you were rebalancing semiannually.

Then in 2020, as the COVID-19 pandemic spread rapidly across the globe, the market dropped around 35 percent in just a few weeks during February and March. But the recovery was just as swift. If you blinked, you might have missed it as the market bounced back in about six months.

The last bear market we experienced was in 2022, and it was a tough one. What made it especially painful was that nearly everything sold off at the same time. The Federal Reserve had kept interest rates too low for too long, and the government had pumped a lot of money into the economy during the pandemic. That combination led to a sharp spike in inflation, just as rates were sitting at rock-bottom levels. When the Fed finally started raising rates, both stocks and bonds took a hit together.

The difference today is that interest rates are now around 4.3 percent, which gives the Fed significantly more room to lower them if the economy goes off the rails.

Another important point to keep in mind is that investors who were able to buy into the market during major downturns were often richly rewarded. Of course, this is much easier said than done. In the moment, most people understandably freeze up, avoid looking at their statements, or simply do not have extra capital available to invest. But the worst move an investor can make is to panic and sell, locking in those losses for good.

What Are the Historical Ramifications of Tariffs on the Market and the Economy?

Markets have been selling off because they do not respond well to uncertainty, and we are heading into unfamiliar territory with Trump Tariffs 2.0.

It is difficult to predict exactly how this will play out, especially with conditions changing so quickly. That said, some historical context may help.

The most recent tariff war started between the United States and China in 2018. When the tariffs were first announced, the U.S. market fell by about 18 percent from peak to trough. The market eventually recovered by April 2019, after a deal was reached and tensions began to ease.

The last time we saw significant tariffs before that was in the 1930s. The country was already in a depression, and most economists agree that the tariffs made things worse. Protectionist policies spread around the globe, slowing economic activity even further.

So what should you do now? In my experience, during market downturns, a bad investor panics and sells out, a good investor stays the course, and a great investor finds the confidence to put more money to work, knowing they are buying at a discount.

That said, you may find that the current level of risk in your portfolio no longer feels right. Sometimes you have to ride the roller coaster to realize it is not for you. This can be a good moment to reassess your comfort with risk. You do not have to be all in or completely out of the market. There are plenty of ways to meaningfully reduce risk in your portfolio without abandoning your long-term strategy.

If you are feeling concerned or just want to talk through what this all means for your situation, please don’t hesitate to reach out. We are always here to help you navigate times like these.

The best advice, as always, is to stay the course. Turn off the news for a bit, go outside, get some fresh air, and remember that markets have weathered far worse than this and come back stronger every time.