Historically, February in a post-election year has proven to be a tough month for the U.S. stock market, as noted by Carson Group. The S&P 500 (^GSPC 0.55%) experienced a decline of 1.4% last month, weighed down by disappointing economic reports and worries regarding potential tariffs.
Is the dip in February an opportunity to buy? Or is the stock market currently too risky? Here’s what investors need to consider.
The S&P 500 has historically risen from March to August
Over the past decade, the S&P 500 has generally posted positive returns in March, with that upward trend typically continuing through August. The chart below illustrates the average monthly return of the S&P 500 over the previous ten years.
Chart by Author. Above shows the average monthly return of the S&P 500 over the past decade.
As indicated, March has historically been an advantageous time to enter the stock market. The arrival of spring typically brings a wave of optimism that leads to solid returns through the summer. Considering that the average bull market lasts for about five and a half years—more than double the duration of the current bull market—this may appear to be a buying opportunity. Nonetheless, historical precedent suggests that tariffs could disrupt this potential.
The economy is teetering as consumers and businesses face inflation and tariffs
In January, consumer spending unexpectedly dropped by 0.2% compared to December, marking the first month-on-month decline in two years and the steepest drop since the initial phase of the pandemic roughly five years ago. Moreover, consumer sentiment fell to its lowest level in over a year in February due to renewed inflation concerns.
This information is significant as consumer spending constitutes about two-thirds of gross domestic product (GDP). In other words, consumer spending is the key driver of the economy. GDP growth saw a discernible slowdown in the fourth quarter of 2024, and the latest data regarding consumer spending and sentiment points toward a likely deceleration continuing into the first quarter of 2025.
Data from the Federal Reserve Bank of Atlanta indicates that first-quarter GDP is on track to decrease at an annual rate of 2.8%. If this forecast materializes, it would represent the most significant contraction since the second quarter of 2020, largely driven by weak consumer spending. Additionally, a record trade deficit in January—where imports significantly exceeded exports—was also a contributing factor.
Recently, President Donald Trump enacted a 10% tariff on China and intends to introduce another 10% tariff in March, along with a 25% tariff on Canada and Mexico. Trump has even mentioned a potential 25% tariff on the European Union. Manufacturers have rushed to mitigate the impact by stockpiling inventory, but this is just a temporary fix.
The introduction of tariffs will increasingly weigh on corporate earnings because businesses face two choices: absorb cost rises, leading to reduced profit margins, or pass those costs onto consumers, likely resulting in diminished sales. In either scenario, earnings are poised to suffer, potentially dragging the stock market down.
Image source: Getty Images.
History indicates that a higher average tariff rate could depress the stock market in 2025
During his first term, President Trump enacted various tariffs in 2018 and 2019, which ultimately raised the average tariff rate on all U.S. imports to 2.7%, according to the Tax Foundation. As investors absorbed these tariffs, the S&P 500 fell by 19.8% over a three-month span from September to December 2018.
Crucially, President Trump is proposing more aggressive tariffs this time around. If all suggested tariffs are enacted, the Tax Foundation estimates the average tariff rate on U.S. imports could soar to 13.8%, the highest level since 1939. Given that an increase in the average rate to nearly 3% resulted in a 19.8% drop in 2018, a rise to nearly 14% could provoke an even steeper decline in 2025.
In conclusion, while March has historically served as a launchpad for substantial summer stock market returns, the current bull market is less than two-and-a-half years old, making it significantly younger than the average bull market. Nevertheless, concerns about President Trump’s trade policies have introduced considerable volatility and uncertainty into the stock market in recent weeks. This does not imply that investors should steer clear of stocks, but it would be wise to concentrate purchases on their most promising ideas. Additionally, this is a good moment to build a cash reserve for capitalizing on the next market downturn.
Notably, the S&P 500 bounced back quickly from the market correction that started in late 2018, recovering its losses and achieving new highs by May 2019. A similar recovery pattern might unfold this time, suggesting that investors should prepare to take advantage of potential dips.
Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
