Have you been keeping an eye on your portfolio lately? Things have become quite interesting since January, and not in the way most investors would have hoped. In the roughly three months since Trump moved back into the White House, the financial markets have already taken quite a beating. Given the current trajectory, the markets could still experience another 25% decline.
The Damage So Far
Remember how the markets were riding high in January? Well, that party didn’t last long. The S&P 500 has tumbled around 15% from its peak of over 6,140 to under 5,300 now. If you’re heavy in tech stocks, we feel for you – the Nasdaq has taken an even bigger hit, down a whopping 20% from its highs.
And crypto enthusiasts? Bitcoin has corrected about 20%, too. Ethereum has dropped 50% this year. See The Downfall Of Ethereum (ETH).
Meanwhile, 10-year government bond yields have fallen from 4.8% in January to 4.3% now, which typically signals investors fleeing to safer options.
Speaking of safe havens, gold has been shining bright – up roughly 25% so far this year. Classic flight to safety, right?
What Sparked This?
So what got us here? It all kicked off when the new administration started imposing those tariffs on trading partners. Remember those campaign promises about getting tough on trade? Well, they’re becoming reality, and the trade war with China has escalated significantly.
What Does This All Mean?
Let’s break this down in simple terms. When you slap higher tariffs on imports, you’re basically taking cheaper goods out of the market. What happens next? Prices go up. That’s just basic economics.
And rising prices could mean inflation spikes again. If that happens, the Fed might have to put those interest rate cuts we’ve all been hoping for on hold. Tricky situation, right?
But here’s the real worry – economic growth slowing down, or worse, sliding into a recession. And if you think the market damage in Trump’s first three months is bad, just wait until recession fears really take hold.
History Doesn’t Paint a Pretty Picture
Let’s get real about what markets do during economic stress. The S&P 500 has a track record of serious crashes:
During the dot-com bubble, it plunged 47%. The Great Financial Crisis? Even worse – down 55%. The COVID crash knocked it down 34%. Even the 2022 drawdown saw a 20% drop.
Those aren’t small numbers. They represent trillions in market value vanishing.
The Bottom Line: How Much Lower Could We Go?
Here’s where things get really interesting. We’re already down 15% on the S&P 500, but if we use those previous market crashes as our guide, we could be in for a much steeper decline.
Consider this: we’re currently sitting at about a 15% drawdown from the peak. But the average of those four major market crashes we mentioned earlier is about 39%. That suggests we could potentially see another 24% decline from current levels if a full-blown recession materializes.
In real numbers, that would take the S&P 500 down from its current level around 5,300 to approximately 4,030 – erasing nearly two years of gains.
What’s particularly concerning is that we’ve already seen this 15% decline without an official recession. Historically, the biggest market drops come when economic reality catches up with market sentiment.
So what’s your move? Whatever you do, buckle up – if history is any guide, we might be in for a much bumpier ride than what we’ve seen so far. Surely, you can talk to professional financial advisors. Trefis works with Empirical Asset Management – a Boston area wealth manager, whose asset allocation strategies yielded positive returns even during the 2008/2009 timeframe, when the S&P lost more than 40%.
Empirical has incorporated the Trefis HQ Portfolio in its asset allocation framework to provide clients better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
While investors have their fingers crossed for a soft landing by the U.S. economy, how bad can things get if there is another recession? See the last six market crashes compared.
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