Market Volatility: Understanding Recent Trends in the S&P 500

For over a century, the stock market has consistently enriched patient investors. However, the price of admission to financial opportunities on Wall Street involves facing volatility.

After more than two years of persistent optimism, major indices like the Dow Jones Industrial Average (DJINDICES: ^DJI), the widely monitored S&P 500 (SNPINDEX: ^GSPC), and the growth-oriented Nasdaq Composite (NASDAQINDEX: ^IXIC) have recently taken a downturn. As of the market close on April 17, the S&P 500 reached a 12.3%, 14%, and 18.8% decline respectively from their all-time highs on February 19.

Currently, both the Dow and the S&P 500 are categorized as in correction territory, while the Nasdaq Composite’s dip as of April 8 has marked its first bear market since 2022.

Image source: Getty Images.

The S&P 500’s performance this year has been particularly disappointing. As of April 18, the index experienced its fifth-worst start through 73 trading days since 1928, with a drop of 10.2%.

Amid the fear and uncertainty that often accompanies such volatile periods, historical patterns suggest that previous double-digit downturns in the S&P 500 at the start of the year have often predicted the following directional trend for stocks with complete accuracy.

Current Economic Factors Driving Volatility

Before examining the historical correlation between early-year declines and future recoveries, it’s essential to identify the key factors currently pressuring equities. These headwinds are likely to persist in the near term.

One of the most significant challenges is posed by former President Donald Trump’s recent tariff announcements. On April 2, termed “Liberation Day,” Trump introduced a global tariff of 10%, coupled with increased “reciprocal tariffs” on select countries that maintain trade deficits with the U.S.

Trump maintains that these tariffs will generate U.S. revenue, promote domestic production, and enable American goods to compete more effectively against imports.

Nevertheless, uncertainties surrounding this tariff policy include potential deterioration in international trade relations, a possible increase in inflation rates, and the prospect of decelerated economic growth.

A study conducted by four economists from the New York Fed at Liberty Street Economics found that businesses negatively impacted by Trump’s China tariffs from 2018 to 2019 experienced declines in profits, sales, employment, and labor productivity from 2019 to 2021.

In addition to tariff concerns, the stock market began 2025 at one of its highest valuations on record.

S&P 500 Shiller CAPE Ratio data by YCharts.

The Shiller price-to-earnings (P/E) ratio, also known as the cyclically adjusted P/E Ratio (CAPE Ratio), indicates that stocks are historically overpriced. In December 2024, this ratio neared 39, marking one of its highest levels during a bull market in 154 years. Historically, similar scenarios preceded the collapse during the dot-com era in 1999 and the bear market beginning in January 2022.

When stocks hold such elevated valuations, adjustments are required. Typically, either corporate valuations must decline, or corporate earnings must rise to render valuations more appealing. Historically, Shiller P/E ratios exceeding 30 have led to declines of 20% or more in the major indices.

Other catalysts contributing to the prevailing fear and volatility include forecasts from the Atlanta Federal Reserve predicting a contraction in U.S. GDP for the first quarter, and rising Treasury bond yields, signaling potentially higher borrowing costs.

Image source: Getty Images.

Historical Recovery Patterns Post Poor Market Starts

While history doesn’t guarantee future results, examining how the S&P 500 typically reacts after a rough start may offer some insight. Despite the current 10.2% drop, looking back at the index’s previous 20 worst starts reveals a notable recovery pattern.

As noted by Charlie Bilello, Chief Market Strategist at Creative Planning, those 20 worst beginnings resulted in declines ranging from 4.7% to 24.6%. Excluding the current downturn, there was an increase in S&P 500 value 58% of the time from day 74 through to year-end following these poor performances.

Of particular interest, only five of the past 98 years recorded a loss of 10% or more through the first 73 trading days (1932, 1939, 2020, 1942, and 2025). In these instances, the S&P 500 finished the year higher 100% of the time. While the index has historically averaged a 10% return per year, these four poor-start years yielded an average return of 22.8% for the remainder of the year.