Investing Insights: Should You Buy Stocks After Market Swings?

Many investors may feel overwhelmed by the stock market’s recent volatility. The S&P 500 (SNPINDEX: ^GSPC) fell sharply following President Donald Trump’s announcement of significant “reciprocal tariffs” on numerous countries. However, the president’s subsequent 90-day delay on most tariffs resulted in the S&P 500’s largest one-day gain in years.

Should investors take the opportunity to purchase stocks following this latest market downturn? Here is what historical trends indicate.

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Successful Early Rebounds in the Market

The S&P 500, which has included 500 companies since its inception in 1957, has experienced similar declines about 13 times since then (ignoring the current drop). However, rebounds have proven to be consistently successful only twice.

The most recent notable rebound occurred in 2020. February saw a plunge in stocks as the COVID-19 pandemic triggered global lockdowns. By late March, the S&P 500 began its recovery, successfully regaining all losses by the end of the year.

^SPX data by YCharts

Another significant example occurred in October 2018, when the S&P 500 once again faced a sharp decline. It managed a rebound by the year’s end, sustaining positive momentum well into the following months.

^SPX data by YCharts

Unsuccessful Bounces Following Declines

Unfortunately, most initial rebounds after steep S&P 500 declines have proved temporary. For instance, the big sell-off in 1957 resulted in the index stagnating around its lows for months post-rebound.

^SPX data by YCharts

In its first year, the S&P 500 fell for several months and attempted a recovery. However, it remained range-bound until early 1958 before embarking on a more substantial upward trend.

More notably, the burst of the dot-com bubble in 2000 caused the S&P 500 to experience multiple failed rebounds before it finally turned around in early 2003. The index did not recover fully until May 2007, more than seven years after the initial downturn.

^SPX data by YCharts

Just three years ago, the S&P 500 slipped into a bear market in June 2022. The decline initially seemed short-lived, and by August, the index had regained nearly half of its losses. However, it fell sharply again, eventually sinking lower than before, only to fully recover in late 2023.

^SPX data by YCharts

Key Takeaways from Historical Market Trends

Investors should recognize that an initial rebound in the S&P 500 often does not signify a strong ongoing recovery. More frequently than not, the index may struggle after the first bounce.

However, an important lesson from historical performance is that buying and holding the index over the long term has consistently yielded positive returns.

^SPX data by YCharts

The most prudent strategy has historically been to invest in the S&P 500 through a mutual fund or exchange-traded fund (ETF) and hold for the long term. Investors implementing a dollar-cost averaging approach have particularly seen impressive long-term results.

Returning to our initial question: Should you buy stocks on the rebound after the latest market downturn? If your investment horizon is five years or more, history strongly supports a positive answer.

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Keith Speights has no positions in the stocks mentioned. The Motley Fool has no positions in any of the stocks mentioned. The Motley Fool maintains a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.