In 1926, magician Harry Houdini died from acute appendicitis after a surprise punch to the abdomen by a college student, illustrating how an unprepared blow can prove fatal. The same lesson applies to financial markets: the biggest shocks often come from sudden, unforeseen "punches."
In April 2025, the U.S. government's abrupt tariff policy announcement was such a blow. With a 145% tariff slapped on Chinese goods and additional levies on major trading partners during what was branded as "Liberation Day," the S&P 500 plunged 10.5% within just two days, and the VIX spiked to 53. It was one of the sharpest shocks since COVID-era turmoil.
Markets tend to lower expectations during periods of instability — and the lower expectations fall, the easier it is for even minor positive surprises to trigger a relief rally. The S&P 500’s price-to-earnings (P/E) ratio has fallen from 22.4 in February to 18.1 today, reflecting much lower growth assumptions.
Historically, extreme spikes in the VIX have often coincided with market bottoms. Since 1990, roughly half of the markets that dropped over 10% saw their bear runs end within a week after the VIX peaked, with some cases marking the bottom on the same day. This is why technical analysts often advise: "Buy when the VIX is high."
However, this downturn may not be a typical short-term correction. Tariffs, high interest rates, and fiscal tightening are jointly pressuring the real economy, suggesting the potential for a prolonged recession rather than a simple dip. During the 2008 financial crisis, even after the VIX peaked, the S&P 500 fell an additional 10% over the following months.
Moreover, some argue that the VIX no longer captures market sentiment as accurately as it once did, due to structural changes in the options market. Nonetheless, the fear itself is very real — and expectations are already historically low.
Ultimately, the key lies in how one responds after taking the hit. Houdini’s law suggests that while you can't always anticipate shocks, you can prepare to recover from them. If you have patience and a long-term perspective, this could very well be the window of opportunity you’ve been waiting for.
(Source: optimisticallie.com)
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