Understanding Last Week’s Selloff and What It Means for You

The magnitude of last week’s tariffs announcement triggered a sharp decline in the stock market, which left many investors feeling uneasy. The drop could have significant effects on inflation, economic growth, and the broader market. It’s important, however, to understand the context and potential opportunities for investors in times like these. 

The Impact of Tariffs on the Market 

If the new policy is fully implemented, the average tariff rate could reach 22 percent to 23 percent— potentially the highest level in more than a century. This clearly has implications for inflation and  economic growth moving forward. Following this news, the S&P 500 index declined 10.5 percent in just two days. Additionally, China announced that it would retaliate with 34 percent tariffs of its own, further adding to investors’ anxieties. 

Thursday’s and Friday’s market drops are particularly notable, as they marked only the sixth time since 1950 that the S&P 500 fell by such a large margin in such a short time. It happened once in 2020, twice in 2008, and twice in 1987—during the Covid pandemic, the Great Financial Crisis, and Black Monday. In short, what happened on Thursday and Friday has only occurred during periods of systematic shock over the last 75 years. 

What Does This Mean for the Economy? 

Uncertainty around trade policy and the implementation of tariffs has contributed to increased volatility in the market for the better part of two months now. Last week’s announcement has increased that uncertainty. With so much still unknown about how these tariffs will be implemented and how they will affect global trade, the range of potential outcomes for the economy, inflation, interest rates, and  corporate earnings has widened. This uncertainty means we’re likely to see continued market fluctuations for the near future. 

As fear grows, one commonly watched indicator, the VIX (CBOE Volatility Index), has spiked to its highest  levels since the Covid pandemic. The VIX measures investor anxiety, so these levels indicate a significant amount of concern. While the VIX can and has gone higher, we are approaching peak levels of fear seen over the last 35 years. 

Potential Opportunities 

While market sell-offs can be uncomfortable, history shows that periods of sharp decline can also be good times to find opportunities for long-term growth. Times of crisis like those mentioned above ultimately proved to be buying opportunities once the dust settled. In fact, if you look at how the market performed six and nine months out from those dramatic declines, returns were generally positive. Keep in mind, however, that past performance does not guarantee future results. 

The recent market decline has erased the gains the S&P 500 made over the past 12 months, bringing the index back to where it was in April 2024. While this can feel discouraging, it also changes the factors we need to consider when making investment decisions. 

One positive takeaway is that stock valuations have improved. The price-to-earnings (P/E) ratio indicates that, compared to earlier in the year, stocks are now priced more reasonably. Looking ahead, all eyes will be on corporate earnings over the next several weeks. These updates will give us a clearer picture of how companies are performing and could help guide future investment decisions. 

What to Do Now 

1. Revisit long-term goals and make sure they are still appropriate. Does your strategy still align with your objectives? 
2. Rebalance your portfolio. As we have said many times over the years, this is the one thing you should do each year. 
3. Consider investment opportunities. Major sell-offs like the one we have recently experienced can create opportunities to enhance portfolios over the long term. Investors should consider looking for those opportunities now with a focus on diversification. 

Final Thoughts 

The current situation remains fluid, and there is still a lot to learn about how tariffs will be implemented  and how global trading will be impacted. That will continue to weigh on investors, however, as media reports over the weekend said more than 50 countries had reached out to negotiate deals. Several countries have announced they won’t retaliate. These are signs that the situation may stabilize. 

That said, it takes time to rebuild investor confidence as it did in 1987, 2008, and 2020. And it doesn’t happen without signs of improvement in the economy or earnings.  

While it may be tempting to step to the sidelines when things feel uncertain, history shows that markets may recover even before all the bad news has passed, as investors look ahead to better times.  

This material is intended for informational/educational purposes only and should not be construed as investment advice, a  solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for  more information specific to your situation. 

Authored by Chris Fasciano, chief market strategist at Commonwealth Financial Network®.