The long-term effects of the recent selloff may not be as harsh as many fear
In case you’ve managed to miss the biggest news to hit Wall Street in approximately five years, Thursday’s Trump tariff takedown of the stock market sent the Dow Jones Industrial Average (DJI) 1,679 points lower. Along with the S&P 500 Index (SPX) and Nasdaq Composite (IXIC), all three major indexes logged their worse daily percentage drops since 2020. Friday offered no reprieve, with Wall Street selling off into the weekend and the blue-chip index brushing together a 10% drop in two days.
When the dust settles on Friday, the SPDR S&P 500 ETF Trust (SPY) will be sitting at an 11-month low after a 4.9% drop on Thursday and a 5.9% drop on Friday. This all adds up to SPY’s worst weekly performance since March 2020, the height of the Covid crash. Now down 13.7% in 2025, the ETF is a far cry Feb. 19 record high of $613.23. It would also mark the SPY’s second consecutive close beneath the 320-day moving average, the first time such a breach has occurred since March 2023.
Thursday’s recent SPY signal (defined as a drop of 3% or more in shares) was the first such signal since August 2024. In the chart below, curated by Schaeffer’s Senior Quantitative Analyst Rocky White, it shows all the times the SPY gapped lower by 3%+ since 1999. It only counts one signal over a month time frame, so you don’t get multiple signals skewing the summarized returns. Per this data, the two-week and one-month returns underperform. The one-month returns are interesting because the percentage positive after a signal is an impressive 82%, but the two negative returns are huge -- dropping the average to just 0.09%.
Upon first pull of the SPY’s performance after a 3% or more bear gap, numbers were heavily influenced by early 2020’s pandemic crash. However, if we only consider data points where it was the only signal within a month, the open to close returns look bullish. The one-month returns show 80% positive, but two of the 10 one-month returns are losses of more than 15%. In simpler terms, the long-term reaction for the SPY after such a large pullback tends to be positive, but when it does extend the slide, the selloff is significant. Unsurprisingly, the worst next-month drops came in January 2008 (financial crash) and February 2020 (Covid), with drops of 16.9% and 24.6%, respectively.
The early 2020 Covid-19 crash skews the table when included. However, just for fun (and who doesn’t love an extra table), I’ve added it below, just to give a peek into how significant (and relentless) the gap lower was for the SPY. Despite the relentless nature, the majority of one-month returns were bullish. Of the eight signals in 2020, only three were lower the following month, making the one-month win rate during a SPY open 3%+ from the prior session’s close in 2020, more than 60%.
It's impossible to know where the remaining four years of a Trump administration will leave the status of global trade, with the first months already inundated with tariff tensions and retaliatory measures from importing countries. However, the subsequent long-term effects may not be as harsh on stocks as many fear. In fact, if the resilient snapback of spring 2020 is any indication, May 2025 could bring some stability.