President Donald Trump shocked Wall Street when he announced a raft of severe tariffs on April 2, a date he dubbed “Liberation Day.” Most analysts assumed a 10% universal tariff was the worst-case scenario, but Trump used that as a starting point and tacked on much higher country-specific reciprocal tariffs.
The S&P 500 (SNPINDEX: ^GSPC) crashed in the following days as strategists issued dire warnings, cut earnings estimates, and raised recession probability forecasts. The index closed nearly 19% below its record high on April 8. Meanwhile, the CBOE Volatility Index (VOLATILITYINDICES: ^VIX) rocketed above 50 for only the 75th time since 1990.
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The S&P 500 has since rebounded 14% as Trump has softened his stance on trade policy, at least temporarily. That means the stock market is doing something rarely seen in the last 35 years: recovering from a period of extreme volatility. And history is crystal clear about what happens next.
History says the S&P 500 will rocket higher in the next year
The CBOE Volatility Index, commonly called the VIX, measures stock market volatility using the prices of S&P 500 options contracts. The VIX is sometimes referred to as the fear gauge among financial media because volatility often coincides with downward movements in the stock market.
The VIX recorded a closing value of 52.3 on April 8, topping 50 for only the 75th time since 1990. That period covers 8,920 trading days, which means the VIX has closed above 50 less than 1% of the time. But the S&P 500 has always rocketed higher during the next one, three, and five years, and the returns have typically been robust.
Listed below are the average returns over different periods after the VIX closed above 50.
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1-year return: 35%
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3-year return: 55%
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5-year return: 129%
We can apply that information to the present situation to make an educated guess about the future: The S&P 500 closed at 4,983 on April 8. It will climb 35% to 6,727 in the next 12 months if its performance matches the historical average. That implies 18% upside from its current level of 5,696.
Of course, investors must remember that past performance is never a guarantee of future results. And President Trump’s tariffs are still an unknown variable.
Image source: Getty Images.
History says the S&P 500 will crash if the U.S. economy falls into recession
In April, consumer sentiment nosedived to its fourth-lowest reading since May 1980, and consumer inflation expectations increased to their highest level since October 1981, according to the University of Michigan. That almost unprecedented pessimism suggests Americans are very concerned about how President Trump is handling the economy.
Many economists are concerned, too. Torsten Slok at Apollo Global Management recently raised his recession probability forecast to 90%. “If the current level of tariffs continues, a sharp slowdown in the U.S. economy is coming,” he wrote. Slok says the tariffs imposed by the Trump administration will be a 4-percentage-point drag on gross domestic product (GDP) growth in 2025, which all but guarantees the U.S. economy will contract.
Importantly, if the U.S. economy does slip into recession, the stock market will probably crash. The S&P 500 has declined by an average of 31% during past recessions. So, while VIX readings above 50 have historically preceded robust returns in the next year, the current situation may not fit the historical pattern. The economy is in uncharted territory. Never before has such a large tariff hike been implemented so quickly.
Investors should monitor the situation closely. That means paying attention to inflation, unemployment, and other important economic prints. It also means keeping up with trade policy. The U.S. should start announcing trade deals in the coming weeks. Any sign that the Trump administration plans to significantly roll back tariffs would be good news for the stock market. But any sign that the current tariffs will remain in place could spell trouble.
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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.
