Yesterday’s big bounce on news of President Trump’s 90-day pause on large reciprocal tariffs for all countries but China has staved off financial crisis at least for now but has done little to alleviate shaken nerves and confidence. At the lows today the market gave back roughly two-thirds of the historic one-day rally and ended up giving back about a third at the close today. We are still in a trade war with China and the 90-day pause doesn’t change that. Less equity exposure appears to be the most prudent course of action until we get more clarity on tariffs, trade wars and economic data.
There is a lot to unpack here that we will be covering over the next several issues. With the Best Six Months in the red we will examine the implications of that as well as the continuing bearish post-election year trends we have been tracking. There are also several comparisons to historical market years in the 1930s, 1970s and others that are analogous to 2025 that we will present.
We will continue to dig into fundamentals, technicals, market internals, interest rates, economic readings and sentiment for indications a bear bottom has been reached, and the recovery has begun. For now, the market is suffering from a crisis of confidence. The Worst Six Months begin in May and the Best Six Months were bad. There is a long history of bear markets and recessions in post-election years.
A quick look to pages 174 and 175 of the 2025 Stock Trader’s Almanac detailing the Best and Worst Days of the stock market shows that yesterday was NASDAQ’s second-best day behind January 1, 2001, and a top ten day for the other indexes. But a closer look reveals that these were all bear markets. Only in March 2020 during the early days of Covid was a quick bottom delivered, in fact the shortest bear market on record at just 40 days for Dow and 33 for S&P 500 and NASDAQ (2025 Almanac, pages 133-34).
At first blush you might equate this to the Covid decline, but this time around the selloff has been manufactured and there do not appear to be massive fiscal stimulus or Fed rate cuts coming to the rescue. Today we will examine the history of these types of Waterfall Declines. Volatile market action that culminates in deep, fast selloffs as we have experienced over the last couple of months and most acutely over the last several days often result in sharp recoveries.
Headline causes of each of these historic waterfall declines are all different and yet investor, trader and money manager behavior remains rather similar. Fear has once again exposed the market’s overvaluation and weaknesses. This time it’s the fear of tariffs, trade wars, recession, financial crisis and global instability. Before this was Covid in 2020 and in 2022 it was the Russia-Ukraine war, rampant inflation and aggressive Fed rate hikes.
Like the previous occurrences of waterfall declines in the table below the market reacted to fear and sold off fast and hard. It’s too early to tell if this waterfall decline is over or how fast and far the recovery will be. As we continue to analyze the current situation a thorough review of the history of waterfall declines and their subsequent recoveries should provide some much-needed perspective.
Most bear market bottoms since 1950 were preceded by precipitous declines. These plunges, or waterfall declines, ranging from 12-28% and 2-4 months in duration, were responsible for creating the feelings of outright fear, desperation and helplessness that characterize investor sentiment at bear market bottoms. Remarkable however, is the fact that it only took 3-8 months for the rebound from those bottoms to reach the levels where the final declines began.
This phenomenon was first documented in December 1974 by our illustrious founder and sage, the late, great Yale Hirsch. In the January 1975 issue of this newsletter’s predecessor dated December 11, 1974, this discovery enabled Yale to accurately forecast a 38.5% rise in the Dow from December 1974 closing low of 577.60 to 800. The headline read “Dow 800 By April 1975” – one of Yale’s many bold, prescient and amazingly accurate forecasts.
Also astounding is how this pattern has recurred at practically every bear market bottom since. For this current study we have gone back a little further than Yale’s original work and examined every bear market since 1950. Two bear bottoms did not qualify (1982 & 1987) as they did not meet our waterfall decline criteria and two were slightly off (1957 & 1984). The waterfall declines in August 2015 and December 2018 were not bear market bottoms. The rest fit the bill to a tee.
Too Early To Tell
It is too early to tell if the bottom is in. Our analysis shows that while a lot of damage has been done, we have not reached the lows yet. While we may be close to the lows in level, it appears that they will be tested over the coming weeks or months. Technical support at S&P 5000 is tenuous at best and below that is the July 2023 highs/January 2024 lows around 4600-4700, then the 2023 lows around 4000-4100. Below there are the pre-covid highs and 2022 lows in the 3400-3500. We blasted through all near-term support so where the market finds support next is anybody’s guess.
We remain concerned about the tariff trade war, economic weakness and increased likelihood of recession. Geopolitics is off the front page right now, but a trade war with China in play brings potential heightened tensions in the Pacific theater on top of continuing hostilities in the Russia-Ukraine war and the Mideast.
This too shall pass. But it’s not likely over yet. If you could put away your phone and turn off the TV for six months, it probably wouldn’t be a horrible idea. The time to buy over the next several weeks and months will present itself. For now, sit tight and keep your powder dry, the bear has reared its head and recession is quite possible.
Exceptions to the Rule
The final drop to the 1982 bottom was not as severe as the others and ended the 16-year secular bear market that had ruled the market since 1966. Unemployment peaked at its post-WWII high of 10.8% and the snapback rally reclaimed the level of the final decline in eight days. The 1987 Crash, caused by a technical glitch at the New York Stock Exchange, created a 34.2% freefall in 17 days which took nearly 2 years to reclaim.
1957’s nascent decline may have been exacerbated by the passage of the Civil Rights Act of 1957 and the related racial standoff in Arkansas. The rebound here took ten months, somewhat longer than the others. AT&T’s breakup in January 1984 likely awoke the bear. The sideways action from February to the July 1984 bottom made this waterfall decline and rebound the exception. As mentioned above August 2015 and December 2018 were not bear market bottoms. All of the remaining 19 bear-market-bottom final waterfall declines were triggered by an exogenous event or major financial/economic calamity.
Cuba, USSR, Vietnam & Watergate
Cold war machinations spooked the market in 1960 when the USSR shot down a U.S. U-2 spy plane in Soviet territory in May and Castro seized U.S. oil refineries in June-July, which led to Cuban embargo, which largely remains in effect over 60 years later. JFK’s 1962 crackdown on the steel industry in April sent Wall Street reeling. When the U.S. escalated military action in the Vietnam theater in 1966 by firing into Cambodia, bombing Hanoi and pumping up troop levels near half a million, the market blew up as well.
More trouble in Vietnam and swelling protests here in the States, culminating in the Kent State and Jackson State shootings, forced a bottom in May 1970. Nixon’s halt on the convertibility of gold and the implementation of wage and price controls tipped the scales in 1971 and helped push the market lower. Nixon’s resignation on August 9, 1974 set off the final plunge of the 1973-74 bear. An increase in Social Security taxes and minimum wage hike in late 1977 helped facilitate the last gasp of the 1976-78 bear.
With inflation sky-high in January 1980, President Carter imposed economic sanctions on the USSR in retaliation for the Soviet invasion of Afghanistan. The February 1980 attempt by the Hunt brothers to corner the silver market sent the stock market over the edge and then President Carter forced the U.S. boycott of the Moscow Summer Olympics in April.
Iraq, Long Term Capital, 9/11, Subprime Crisis & Debt Ceiling Debacle
With the junk bond debacle, the S&L crisis and the breakup of the Soviet Union in full swing, Iraq’s August 1990 invasion of Kuwait knocked the market into a tailspin. Over the backdrop of the Clinton-Lewinsky affair and President Clinton’s impeachment, a global financial crisis in the summer of 1998 forced the Russian ruble to collapse and noted hedge fund Long Term Capital to fail, creating one off the shortest bear markets on record.
With the market on shaky ground in the summer of 2001, the terrorist attacks on September 11 closed the market for four days. When it reopened the following Monday, the Dow suffered its worst weekly loss since 1940. In 2002 corporate malfeasance, trouble in Afghanistan and Iraq War drums had stocks on the ropes. WorldCom failed in July and President Bush addressed the U.N. on the “grave and gathering danger” in Iraq in September.
In 2008 the subprime mortgage fiasco had completely morphed into a global financial crisis, the likes of which we have not experienced for decades, and fear of depression loomed. Lehman was allowed to go belly up on September 15 after the government took over Fannie Mae and Freddie Mac and orchestrated the rescue of several large financial institutions and subsequent bailout of others.
Finally, on October 1, the U.S. Senate passed the $700 billion bailout bill. The Dow proceeded to plunge, falling for the first eight trading days of October in a row, suffering its worst weekly loss ever. DJIA initially hit bottom on November 20 at 7552.29 and rallied to close out 2008, but suffered a second waterfall decline before finally reaching bottom on March 9, 2009, at 6547.05.
In 2011 the European Union was mired in a sovereign debt crisis while here in the states, Congress was deadlocked and initially unable to come to terms over raising the U.S. debt limit. The U.S. lost its AAA credit rating, consumer and investor confidence fell and DJIA dropped 16.3% in 2.5 months from July to October.