What is the S&P 500? A complete guide to this key stock market index
Understanding the S&P 500: What it is and why it matters
The S&P 500 (SNPINDEX: ^GSPC) closed at a record high of 6,144 on Feb. 19. But the benchmark index has since declined by just under 6%, as of Tuesday’s close. Concerns about how trade policy will impact the already shaky U.S. economy have factored heavily into that rapid drawdown.
President Donald Trump’s tariffs on Canada and Mexico took effect this morning, with a new levy on China added to the one that took effect in February. Trump has also threatened to impose tariffs on the European Union. Importantly, every country impacted has either retaliated or plans to retaliate with their own tariffs, touching off a trade war.
History offers two conflicting opinions about what happens next in the stock market. Here’s what investors should know.
The S&P 500 could stage a rapid rebound in the coming months
In the past four decades, the S&P 500 has frequently recorded intra-year drawdowns of at least 5%. However, the declines were typically brief. Research published last year by Goldman Sachs said, “We find that 5% pullbacks have historically been good entry points, as the index has gone on to provide a median 6% return over the subsequent three months, with positive returns in 84% of episodes.”
In short, history says the S&P 500 may rebound sharply in the coming months, in which case the present is theoretically an excellent time to buy stocks.
But past performance may not be indicative of future results in this scenario. The strong U.S. economy Trump inherited less than two months ago is now starting to crack under the weight of inflation and tariffs.
Tariffs could also be big trouble for the stock market, at least temporarily
Consumer spending unexpectedly tumbled 0.2% in January, the first month-on-month decline in nearly two years and the largest decline in four years. Also, consumer confidence fell 7 percentage points in February, the worst month-on-month deterioration in more than three years, according to the Conference Board.
Those disappointing consumer data points hint at trouble for the U.S. economy. Consumer spending accounts for about two-thirds of gross domestic product (GDP), meaning it is the primary driver of economic growth. Given the present weakness, advanced estimates suggest first-quarter GDP is on pace to decline an annual rate of 2.8%, the sharpest decline since the second quarter of 2020.
Consumers are concerned for two reasons. First, inflation as measured by the Consumer Price Index (CPI) has accelerated in four straight months. Second, tariffs recently imposed by President Trump will almost certainly make inflation worse. That’s because businesses typically past the cost increases associated with tariffs along to buyers.
Investors are worried about the fallout, as evidenced by the 6% decline in the S&P 500. But the problem could get worse. Trump in his first term effected a series of tariffs that pushed the average tax on U.S. imports to 3%. But tariffs implemented year to date, coupled with potential tariffs on the European Union, would raise the average tax on U.S. imports to 13.8%, according to the nonpartisan Tax Foundation.
Importantly, the S&P 500 suffered an intra-year drawdown of 19.8% in 2018 as the market reacted to Trump’s tariffs. So, with the average tax on U.S. imports set to rise more sharply this time around, the drawdown in the S&P 500 could be correspondingly larger. However, there is a silver lining: The stock market recovered very quickly from the 2018 drawdown.
Specifically, the S&P 500 declined 19.8% over a three-month period between September and December 2018, but the index had recouped its losses and reached a new high by May 2019. That’s because the market tends to overreact to good and bad news.
It’s too soon to tell if that pattern will hold again. But the ultimate lesson of history is that there’s never been a moment of uncertainty that the market hasn’t recovered from. So be cautious — and opportunistic. Keep a watch list of stocks you’d want to own if their valuations looked more favorable, and be ready to buy the dip.
Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
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