It has been a difficult week to be an investor, or just to read or listen to financial news. U.S. markets ended the week with a major sell off after the tariff announcement on April 2 and tariff retaliation by China the next day.
The headlines have trumpeted the speed of the market decline and the concern that a prolonged trade war may cause a recession in the U.S.
Without question a 10% market decline in a couple days is hard to stomach and is enough to make any investor second guess their investment strategy.
While I can’t predict what markets will do going forward, it is helpful to look back at what we can learn from the past.
Stock price declines, even big ones, happen often: We only have to look back to March, 2020 when Covid hit to find 3 separate days where the Dow Jones average dropped 2,000 points in a day – March 9, March 12 and March 16. (1) Those drops were larger in percentage terms (7.8%, 10% and 12.9%) than anything in the past week.
Markets suffered through 20% declines in 2022, just short of 20% the last quarter of 2018 and several one day drops of over 5% in 2008, including 7.8% on December 1, 2008. (2)
Stock prices recover, often very quickly: In 2020, stock prices recovered their entire drop by August, 2020 and finished at records in December, 2020. (3) Stocks had very strong gains in 2019, 2023 and 2024 after declines in the previous years.
Stock prices aren’t a perfect predictor of the economy: There’s a saying that stock markets have “predicted 9 out of the last 5 recessions.” Markets often go down too quickly, predicting the worst when the worst doesn't happen.
That may be true now, because the economy is strong by many measures. On Friday, the monthly labor report showed the U.S. added 228,000 jobs and the unemployment rate is 4.2%. (4) Economic indicators are not pointing at an imminent recession, even if risks of a slowdown have increased because of tariffs.
Diversification is helping: Bonds and money market funds are working to diversify portfolios. U.S. government bond funds have gained in value during the stock sell off and money market funds are stable. (5)
The cause of this stock decline is readily “fixable”: At the beginning of Covid, no one knew how bad it would be. The modern world hadn’t dealt a pandemic. It probably made sense for stock prices to go down until we had some idea how the economy (and civilization!) would fare. It really was uncharted waters.
The same thing was true in 2008 during the great financial crisis – we hadn’t dealt with banks collapsing since the Great Depression in the 1930’s. There were a lot of questions about whether we were headed into another long depression.
The current stock decline is clearly tied to tariffs and retaliation. We know the causes, and it is reasonable to think that there will be negotiations that reduce tariffs to an acceptable level to countries and businesses. No leader of a country wants to plunge their economy into a self induced recession, despite what their “game face” might be right now.
A well known financial writer makes an analogy to the behind the scenes negotiations during Cuban Missile crisis. Neither the U.S. or China want to “nuke” their own economy by having a full fledged trade war – at some point common sense will prevail. (6)
Keeping our emotions in check: I love reading Warren Buffett’s letters to Berkshire Hathaway shareholders. They are full of great quotes about dealing with the craziness of markets.
In his 2017 letter (7), he writes that “when major declines occur…That’s the time to heed these lines from Kipling’s If:”
“If you can keep your head when all about you are losing theirs . . .
If you can wait and not be tired by waiting . . .
If you can think – and not make thoughts your aim . . .
If you can trust yourself when all men doubt you . . .
Yours is the Earth and everything that’s in it.”
Seems like good advice for right now.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
Sources:
(1) https://en.wikipedia.org/wiki/2020_stock_market_crash
(2) https://en.wikipedia.org/wiki/2008_financial_crisis
(3) https://www.marketwatch.com/story/dow-sp-500-close-out-historic-2020-at-records-nasdaq-composite-clinches-best-annual-return-in-11-years-2020-12-31
(4) https://www.bls.gov/news.release/pdf/empsit.pdf
(5) https://www.morningstar.com/markets/13-charts-q1s-dramatic-rotation-stocks
(6) https://awealthofcommonsense.com/2025/04/a-short-history-of-tariffs/
(7) https://www.berkshirehathaway.com/2017ar/2017ar.pdf, p. 11