For more than a century, the stock market has been the premier wealth-builder for investors. While real estate, Treasury bonds, and various commodities, such as gold, silver, and oil, have all risen in nominal value, none have come particularly close to rivaling the annualized return of stocks over the very long run.
But there's a price of admission that comes with this top-tier wealth creator: volatility.
Over the last two months, the iconic Dow Jones Industrial Average (^DJI +0.24%) and broad-based S&P 500 (^GSPC +0.26%) have fallen into correction territory with double-digit percentage declines. Meanwhile, the innovation-driven Nasdaq Composite (^IXIC +0.36%) officially dipped into a bear market, as of the closing bell on April 8.
While some corrections in the broader market are orderly (e.g., the near-bear market for the S&P 500 in the fourth quarter of 2018), others take the elevator-down approach. The previous three weeks of trading activity saw the Dow, S&P 500, and Nasdaq Composite log some of their largest single-session point and percentage gains and declines in their respective histories.
Image source: Getty Images.
This outsized volatility has the benchmark S&P 500 on track to do something that's occurred only four times since 1940. The best thing about this rare and sometimes scary event is that it sends a very clear message to investors of what comes next for stocks.
Three reasons a historic bout of volatility has hit Wall Street
Before unearthing the ultra-rare event the S&P 500 has an opportunity to duplicate in 2025, it pays to understand the catalysts fueling this historic bout of volatility on Wall Street. It effectively boils down to three sources of fear and uncertainty for investors.
First, there's President Donald Trump's "Liberation Day" tariff announcements on April 2nd. Trump implemented a sweeping global tariff of 10%, as well as set higher reciprocal tariff rates on a few dozen countries that have historically run unfavorable trade imbalances with the U.S.
Even though President Trump placed a 90-day pause on these higher reciprocal tariffs for all countries but China, there's a real risk of trade relations with China and our allies worsening in the immediate future. This could adversely impact demand for U.S. goods beyond our borders.
The president and his administration haven't done a particularly good job of differentiating between output and input tariffs, either. The former is a duty placed on a finished product, whereas the latter is an added tax on something used to manufacture a finished product in the U.S. Input tariffs threaten to increase the prevailing rate of inflation and might make American-made goods less price-competitive with those being imported.
S&P 500 Shiller CAPE Ratio data by YCharts.
Secondly, the historic priciness of stocks is fueling volatility on Wall Street. In December 2024, the S&P 500's Shiller price-to-earnings (P/E) Ratio (also known as the cyclically adjusted P/E Ratio, or CAPE Ratio), hit its current bull market multiple high of almost 39. This is well above its average multiple of 17.23, when back-tested to January 1871.
Over the last 154 years, there have only been a half-dozen instances where the S&P 500's Shiller P/E surpassed 30 and held that level for at least two months. Following the previous five occurrences, at least one of Wall Street's major stock indexes lost 20% (or more) of its value.
In other words, the Shiller P/E makes clear that the stock market is running on borrowed time when valuations become overly extended to the upside.
The third factor inciting whiplash on Wall Street is rapidly rising longer-term (10- and 30-year) Treasury bond yields. One of the steepest moves higher in decades for long-term Treasury bond yields implies concern about inflation, and points to borrowing potentially becoming costlier for consumers and businesses.
Image source: Getty Images.
The S&P 500 may be on the verge of history -- and it's great news for optimistic investors
With a clearer understanding of why stocks are vacillating wildly in recent weeks, let's turn back to the S&P 500's attempt to make history in 2025.
Based on data collected by Charlie Bilello, the Chief Market Strategist at Creative Planning, the 2.2% decline registered by the S&P 500 on April 16 marked the 18th time this year the index has fallen by at least 1% during a single session. For context, the average number of 1% or greater single-day declines in a given year over the last 97 years (1928-2024) is 29.
While declines of 1% or greater were a very common occurrence during the Great Depression and in the years immediately following it, large clusters of big down days have been somewhat rare over the last 85 years. Between 1940 and 2024, there have been only four years where the grand total of large down days (at or exceeding 1%) topped 56:
- 1974: 67 large down days
- 2002: 72 large down days
- 2008: 75 large down days
- 2022: 63 large down days
These periods coincide with the OPEC oil embargo of the mid-1970s, the tail-end of the dot-com bubble bursting, the height of the Great Recession, and the 2022 bear market.
The S&P 500 fell 2.2% today, the 18th daily decline in 2025 w/ a loss of more than 1%. The average year since 1928 has 29 large declines and we're on pace to exceed that by a wide margin. Downside volatility is the price of admission. No risk, no reward.https://t.co/yRqeegEvuv pic.twitter.com/Ln0P65mgXg
-- Charlie Bilello (@charliebilello) April 16, 2025
Through 106 calendar days (i.e., through the closing bell on April 16), the S&P 500 has endured 18 large down days, or one every 5.89 calendar days. If this ratio holds throughout 2025, the S&P 500 is on track to decline by 1% or more during 62 trading days this year. This level of downside volatility is quite rare for the benchmark index -- but it also offers a huge silver lining.
Each of these rare periods of heightened downside volatility represented a surefire buying opportunity that handsomely rewarded optimists:
- After 1974, and including dividends, the S&P 500 rose by 31.6% one year later, 38.7% three years later, and 57.4% five years later.
- After 2002, and including dividends, the S&P 500 soared by 28.7% one year later, 49.7% three years later, and 82.9% five years later.
- After 2008, and including dividends, the S&P 500 jumped by 26.5% one year later, 48.6% three years later, and 128.2% five years later.
- After 2022, and including dividends, the S&P 500 gained 26.3% one year later.
On average, the S&P 500's total return was 28.3% in the year following a period of outsized downside volatility. More importantly, the benchmark index rose 100% of the time at the one-, three-, and five-year marks (when applicable).
Based solely on what this historical data tells us, a short-lived period of large downs days for the S&P 500 represents a surefire opportunity for optimistic long-term investors to put their money to work.
