Business
As the stock market plunges, experts say, keep emotions out of decision making.
President Donald Trump’s implementation of broad tariffs has sent the stock market into a tailspin, raising concerns about inflation, reduced corporate profits, and a potential economic slowdown or recession.
The downturn began on “Liberation Day,” April 2, when Trump announced the tariffs. The S&P 500 index, a key benchmark for U.S. equities, dropped nearly 10.5% in the following days — including its most significant single-day point loss in recent memory.
In March, the S&P 500 had already entered correction territory, marking a 10% or more decline from its peak, a move Peter Lynch, vice-chairman of Fidelity Investments, once called a “euphemism for losing a lot of money rapidly.”
Now, as the market fluctuates, the S&P 500 is approaching bear market territory, defined by a 20% or more decline from its peak. On Monday, the index briefly dipped into and out of that threshold.
With many investors facing significant losses to their retirement accounts, Boston.com spoke with experts to explain the turmoil and suggest what to do next.
How do the tariffs affect the stock market?
Robert Pozen, a senior lecturer at MIT Sloan School of Management, wrote to Boston.com that U.S. companies pay tariffs to import goods. If companies absorb the costs of the tariffs, they will have lower profits. If they raise prices to compensate for the cost of the tariffs, demand for the goods will fall, lowering profits.
“In either case, stock prices of these companies will fall,” wrote Pozen. “Which has already happened to a significant degree.”
Peter Simon, a professor of economics at Northeastern, explained that the stock market is highly sensitive to unexpected events. “One thing that the market doesn’t like – and one thing that businesses don’t like – is uncertainty,” Simon said. “And right now, there’s virtually nothing out there except uncertainty.”
He noted that tariffs, essentially taxes everyone must pay, reduce consumption and hurt companies’ profits, leading to a “panic” sell-off. The market is “volatile,” Simon added: “It goes up and down at the drop of a hat.”
Simon also pointed out that the market reacts when consumer spending changes. “It might be true that America runs on Dunkin, but it’s definitely true America runs on spending.”
He explained that any disruption that shocks the country leads to lower spending, causing economic activity to slow, inventories to rise, banks to restrict loans, and bond rates to increase.
What does this mean for retirement funds?
As the stock market plunges, so will most retirement accounts, like 401(k)s, 403(b) or nonprofit retirement accounts, Roth IRAs, and even education funds like 529 plans.
Retirement accounts comprise different financial assets, like stocks, bonds and real estate holdings. The amount that is in stocks will determine how much an account goes down.
Simon said that if you are about to retire, many of your stocks have probably already been moved from risky assets. So, the younger you are, the bigger the hit you will see.
Mark Williams, a professor at Boston University’s Questrom School of Business, added however that the younger you are, the more time you have for the market to recover. But, if you are in your 60s and getting ready to retire, that is the demographic with the most anxiety.
“If you had expectations of what you’re going to have at retirement, you may have to reduce those expectations,” Williams said. “You may even think about working longer or part time.”
What advice do you have for investors?
“The first thing they shouldn’t do is panic,” said Simon.
Williams echoed the sentiment, saying, “Do not make a rash decision” and keep “emotion out of your decision-making.”
The best course of action is to stay the course. Williams advises creating a budget that includes when you’re considering retiring based on your losses. Then, ask yourself if it will impact your retirement later or not. If the answer is no, that is informative.
Once you hit your 60s, many investors say you should take 100 minus your age and put that amount in stocks. So, if you’re 60, you should have about 40% in stocks.
Williams emphasized that now is not the time to redo a portfolio, as the market could dip even further.
“I think it’s a fool’s errand to try to time a market,” said Williams. “However, if we do move towards recession, there’ll be plenty of time to pick up stocks that appear cheap now that would be even cheaper in the future.”
Simon said another silver lining is that the value of bonds will go up. When investors sell off stocks, they’re not saving it in cash but buying bonds. As a result, the bond yield increases in value, which can help alleviate the pressure from decreasing stocks. However, it doesn’t entirely compensate for it.
“The stock market is a playground for people with money,” said Simon. “It’s like a huge sandbox. It’s a place for what people with money play around with. But if people would just shrug their shoulders and ignore it, then there would be no change in spending, no change in the GDP, and everybody would be fine — no changes in jobs, no changes in inventories.”
“It’s when people respond — that’s the problem,” Simon said. “If there’s such a thing as human nature — this is human nature.”
Simon continued, “People hear the stock market collapsing, people tell them that the recession is on — and of course they react.”
He noted that most people’s stake in the stock market is mainly in their retirement accounts.
“This is not the time to retire,” said Simon. “Put it off if you can a little bit. This will bounce back.”
What does it mean to enter a bear market or a recession?
Usually, something more significant than the threat of tariffs — like a pandemic, the Great Depression, or the dot.com bubble — brings on a recession.
“This is not a failure of anything,” said Simon. “No banks have gone bankrupt. Nothing’s seriously happened. This is brought on by the threat of loss of sales of companies worldwide, and so it could easily be reversed.”
Also, a bear market doesn’t last, said Simon. Depending on the situation, it usually takes about a year before the economy turns around. However, J.P. Morgan is now putting the odds of a U.S. and global recession at 60%.
“Don’t panic, but it’s hard not to fear if you see your money drying up,” Simons said.
What will the long-term impacts be? Is it too late to reverse course?
Simon said there would be no lasting problems with the bear market. It will come back, and the bull market will be back up. People’s 401(k)s will have lost a little bit, but they will climb back up — as long as people don’t take out too much money.
“I think the lasting effects from this are far more serious — a loss of trust in the government, faith in the US, and the leadership and trade negotiations,” said Simon.
Simon said that while the United States may be one of the largest economies in the world, it’s not the only one that produces food, textiles, minerals, or machinery. Other countries will look elsewhere for trade.
Simon said, “That’s the real tragedy that could occur.”
What if Trump reverses course?
“The damage has been done,” said Williams. Capital markets function on trust and certainty, and Trump’s erratic policy behaviors have caused “great uncertainty and risk in the market.”
The stock market has lost over $11 trillion since January, with over $6 trillion occurring last Thursday and Friday alone. “That’s significant,” Williams said.
Even if Trump reverses the tariffs, the stock market will not be able to recover fully.
Williams said, “When you’re getting closer to retirement and you lose that kind of money, you can’t make it up.”
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