The S&P 500 (^GSPC 0.11%) declined 12% in five trading days in early April, erasing more than $6 trillion from the U.S. stock market. The crash was caused by the surprisingly severe tariffs announced by President Trump on April 2, which he dubbed "Liberation Day."
Meanwhile, the CBOE Volatility Index (^VIX 1.33%), commonly called the VIX, rocketed higher as the stock market tumbled lower. The VIX closed at 52.3 on April 8. That was only the 75th time it closed above 50 since 1990.
This type of volatility can unsettle even the most experienced investors, but it comes with a major silver lining: The S&P 500 has always increased during the 12 months following VIX readings above 50. Moreover, the stock market has historically generated monster returns under those circumstances.
SNPINDEX: ^GSPC
Key Data Points
History says the S&P 500 will skyrocket in the next year
The CBOE Volatility Index (VIX) measures anticipated stock market volatility based on the price of S&P 500 options contracts. It's commonly referred to as the "fear gauge" because volatility frequently (but not always) coincides with downward movements in the stock market.
As mentioned, the VIX closed at 52.3 on April 8, topping 50 for only the 75th time since 1990. For context, that time frame covers about 8,910 trading days, which means the VIX has exceeded 50 less than 1% of the time. However, the S&P 500 has always increased during the next one, three, and five years. The average returns over those periods are listed below:
- 1-year return: 35%
- 3-year return: 55%
- 5-year return: 129%
Investors 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, so the index could advance 35% to 6,727 during the next year if its performance matches the historical average. That implies 27% upside from its current level of 5,288.
Investors should remember that past performance is no guarantee of future results. No stock market indicator is perfect, so the S&P 500 may not perform as expected in the coming year.
Image source: Getty Images.
President Donald Trump's tariffs are still an unknown variable
Excluding the recent incident, the VIX has only closed above 50 during two time periods since 1990. The first was during the financial crisis in 2008 and 2009, and the second was during the COVID-19 pandemic in 2020. While both events created a great deal of uncertainty, they were also finite -- investors knew they would end eventually.
The current situation is less clear because changes in U.S. trade policy are the root cause of the uncertainty. President Trump believes trade deficits are harmful to the U.S., though many economists disagree with that assumption, so he has imposed heavy tariffs that have raised the average tax on U.S. imports to its highest level in more than a century.
That unusually aggressive stance on trade makes the current situation unique, and the tariffs certainly differ from the previous market forces that pushed the VIX above 50. Not only could trade policies persist longer than a financial crisis or pandemic, but the market also lacks clarity on the country-specific tax rates and what exemptions (if any) will apply.
President Trump has paused his most aggressive tariffs for 90 days, meaning more clarity is on the horizon. But the administration has gone back and forth on policy decisions so many times that investors will likely wonder if more changes will be forthcoming after that 90-day pause expires. As long as that uncertainty exists, the stock market will probably struggle to move materially higher.
Here's the bottom line: History says the S&P 500 could soar 27% in the next year. But the current situation may not fit the historical pattern because tariffs are an unknown variable.
Investors can reconcile those two ideas with cautious optimism. Now is a good time to buy high-conviction stocks, but it makes sense to proceed slowly. There's no telling how long or how severe the market downturn will be.
