The S&P 500 just experienced its 12th largest 4-day drop since 1950 -- and history shows this will happen next 100% of the time after such steep declines.
In the past century, no asset class has been able to compete with stocks for annual returns. While holding items like gold, investing in bonds, or buying real estate all generate positive annual returns, stocks are the true wealth creators.
However, generating the highest annual returns among all asset classes is not without its volatility.
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In the past eight weeks, the Dow Jones Industrial Average (DJINDICES: ^DJI), the benchmark S&P 500 (SNPINDEX: ^GSPC), and the Nasdaq Composite (NASDAQINDEX: ^IXIC) driven by growth have gone on a rollercoaster ride. Recently, all three indices recorded some of the largest nominal and percentage fluctuations in a single day ...
This is especially true for the closely watched S&P 500, which lost 12.1% in value over the four trading sessions from April 3 to April 8. Looking back 75 years, this was the 12th largest four-day decline, percentage-wise.
As volatility rises on Wall Street, investors often turn to data points and historical events for clues about what may happen next for the S&P 500 (and stocks in general). While no forecasting tool can guarantee what will happen next, there are several events that have a strong correlation with directional moves in the S&P 500. The recent historical decline is one such case, having so far provided a 100% success rate in predicting future index returns.
Why did the S&P 500 plummet uncontrollably over four days?
But before delving into the data, investors need to have a clear understanding of the catalysts that triggered one of the strongest four-day declines of the S&P 500 since 1950.
At the top of the list of uncertainties causing stocks to drop is the announcement of President Donald Trump's "Liberation Day" tariffs. On April 2, Trump announced a global tariff rate of 10%, along with a series of higher "reciprocal tariffs" against countries with historically unfavorable trade imbalances with the U.S.
In theory, the president's goals are quite simple. He wants to increase revenue for the U.S. from tariffs, protect American jobs, and encourage both U.S. and foreign businesses to produce their products aimed at Americans domestically. But implementing comprehensive tariffs is not as easy as you might think.
Although Trump issued a 90-day pause on most reciprocal tariffs (except for China) on April 9, the tariff-based trade policy still risks deteriorating trade relations with the world's second-largest economy (China), as well as with our allies.
Furthermore, the president's tariff policy does not differentiate between output tariffs and input tariffs. Output tariffs are taxes on imported finished goods, while input tariffs are taxes on products used to produce domestic goods. Input tariffs can push U.S. production costs higher, which may make U.S.-made products less competitively priced compared to products imported from outside our borders.
Investors are also clearly concerned about the rapid rise in U.S. Treasury bond yields. The Trump administration hoped its actions would lower long-term Treasury bond yields, which tends to encourage businesses to borrow for hiring, buybacks, and innovation. But with Treasury bond yields soaring in recent weeks, borrowing money has become more expensive.
According to an update on April 16 from the GDPNow model of the Atlanta Federal Reserve, the U.S. economy is projected to shrink by 2.2% in the first quarter. Excluding the COVID-19 quarters, this would be the largest contraction for the U.S. economy since the latter stages of the Great Recession (Q1 2009).
The combination of tariff-related uncertainty for U.S. businesses and rising Treasury bond yields is the reason stocks are plummeting.
The historical large drop of the S&P 500 is fortunate for long-term investors.
With a clearer picture of the reasons behind the S&P 500's 12th largest four-day drop, let's dive into what history predicts will happen next for this famous index.
Based on data collected by Charlie Bilello, Chief Market Strategist at Creative Planning, the most closely followed index on Wall Street has experienced 15 drops over four days, from 11.5% to as much as 28.5% from 1950 to 2025. Many of these drops correlate with the crash of Black Monday in 1987, the Great Recession in 2008, and the COVID-19 crash in 2020.
But more important than the position of the S&P 500 is its next direction.
As you will see in the post below on social media platform X, Bilello calculated the total returns, including dividends, of the S&P 500 broadly at one, three, and five years after each of these sharp four-day declines. The S&P 500 is higher, on a total return basis, one, three, and five years later, 100% of the time.
At the close of trading last Tuesday, the S&P 500 had dropped 12.1% over the previous 4 trading days, the 12th largest 4-day decline since 1950.
What has happened in the past after the largest 4-day declines?
In addition to the uncontrollable declines in the S&P 500 being historical precursors to future price increases, these events almost always come with periods of soaring investment returns. The 14 worst previous four-day drops in the S&P 500, percentage-wise, produced an average total return of:
33.8% after one year.
49% after three years.
112.1% after five years.
To give you a better understanding, the long-term average annual return of the S&P 500 is around 10%. This means that the worst days of the stock market are often the best days to invest your money on Wall Street.
To add fuel to the fire, analysts at Bespoke Investment Group compared the lengths of every bull and bear market in the S&P 500 from the beginning of the Great Depression in September 1929 to June 2023. What they discovered was a stark difference.
On average, 27 bear markets of the S&P 500 last only 286 calendar days, or about 9.5 months. In contrast, typical bull markets last for 1,011 calendar days, over 3.5 times longer than the average bear market.
Although the astonishing drop of the Dow, S&P 500, and Nasdaq may temporarily cause fear, they are actually a blessing for investors.
👉 In summary: recession is possible...
