On April 2, President Trump held his "Liberation Day," announcing new American tariff policies on over 180 countries. This tariff plan didn't come out of the blue; it had been anticipated for a while, but the severe nature of the tariffs took a lot of people by storm.
To put it lightly, the stock market didn't react well to the tariffs. The Nasdaq Composite officially entered bear territory, the S&P 500 had its worst two-day stretch since the early COVID-19 days, and the Dow Jones Industrial Average is in correction territory. Altogether, over $6 trillion in value were wiped out from the market in the two days following the tariff announcement.
With the tariffs anticipated to cause inflation, slow economic growth, and disrupt many companies' supply chains, JPMorgan raised its recession probability to 60%. When it rains, it pours.
So now, with recession fears rising and stock prices dropping, many investors may wonder if they should wait it out before investing in the market. In short, the answer is no. But let's take a look at why.
Image source: Getty Images.
Recessions have happened before and will happen again
The National Bureau of Economic Research (NBER) defines a recession as a significant decline in economic activity that lasts more than a few months. Quite frankly, recessions are tough and have real impacts on people's everyday lives, but unfortunately they're a natural part of the economic cycle.
There have been 20 recessions in the 1900s and three since the start of 2000. Below is how much the S&P 500 sank during each of the previous three:
| Recession Date Range | Percentage of S&P 500 Decline |
|---|---|
| February 2020 to March 2020 | (34%) |
| December 2007 to June 2009 | (57%) |
| March 2001 to November 2001 | (49%) |
Source: NBER and YCharts. Percentage decline based on S&P 500 peaks and troughs during that time.
You'll first notice that recessions can vary widely in length. Some last months, while others last years. Although JPMorgan's recession probability increased, there's no guarantee it will happen, and there's no predicting how long it will last if it does happen.
The best thing investors can do is prepare for the worst (with saving an emergency fund as the highest priority) and hope for the best. It's much better to overprepare and not have a recession than underprepare and have to experience one.
The stock market has bent but not broken
More important than how the S&P 500 sank during recessions (although that is very important) is how it has managed to bounce back each time.
^SPX data by YCharts. Grey areas indicate official recessions.
Following every recession the U.S. has experienced, the S&P 500 and broader stock market have managed to bounce back and return value in the long run. The length of the recovery varies, but if you're a long-term investor with a relatively good amount of time on your side, you can be almost certain that it will recover.
If you don't have an emergency fund saved, make that your priority before putting money into the stock market. If you have an emergency fund, you could be doing yourself a disservice by completely avoiding investing during this time.
Avoid trying to time the market
One thing to avoid during times of uncertainty like now is trying to time the market. Some people assume stock prices will keep dropping, so they hold off on investing until stock prices bottom out. Others may assume the stock market has hit its bottom and rush to put money into stocks, assuming they're about to rise.
The problem is that nobody can predict the stock market's movements in the short term. You can make educated guesses based on certain indicators or history, but nobody can say without a doubt how it will behave. Of course, staying on course during times like this is much easier said than done, which is why I prefer to use a strategy like dollar-cost averaging.
The Vanguard S&P 500 ETF (VOO +1.21%) is my largest holding and likely will be throughout my investing time. Since I'm focused on the long term, I put myself on an investing schedule that I stick to no matter what. Sometimes, I invest when prices are falling (like now); sometimes, I invest when prices are rising.
The idea behind dollar-cost averaging is that it helps offset the effects of volatility and prevents the urge to time the market because you're on a set schedule. Prices at the time shouldn't determine whether you make your scheduled investments.
If you're a long-term investor, dollar-cost averaging is one of the best strategies you can use. It's simple and tends to be much less stressful than waiting for the "right" time to invest.
