An Exceptionally Rare Event for Stocks -- the 6th Occurrence in 35 Years -- Has Historically Led to Supercharged Returns for the S&P 500

The S&P 500 experienced significant volatility in early 2025, driven by President Trump's tariff announcements and historically high stock valuations, as indicated by the Shiller P/E ratio. Despite this volatility, historical data suggests that substantial declines in the CBOE Volatility Index (VIX) often precede periods of outsized returns for the S&P 500; specifically, the six largest nine-week drops in the VIX have been followed by an average total return of 102.14% for the S&P 500 over the subsequent five years.

Analysis

The U.S. stock market experienced significant turbulence in early 2025, with the S&P 500 achieving a new record high before dipping into correction territory alongside the Dow Jones Industrial Average, while the Nasdaq Composite entered its first bear market in three years. A particularly volatile week from April 2nd to 9th saw the S&P 500 endure its fifth-largest two-day percentage decline in 75 years, rapidly followed by its largest single-day nominal point increase. This heightened volatility, marked by the CBOE Volatility Index (VIX) surging above 50, was primarily attributed to President Trump's 'Liberation Day' tariff announcements, including a global 10% tariff and various 'reciprocal tariffs,' which introduced considerable uncertainty due to a lack of policy consistency. Compounding these pressures were historically elevated stock valuations, with the S&P 500's Shiller P/E ratio nearing a multiple of 39 in December 2024—its third-priciest reading since 1871—and rising long-term Treasury bond yields signaling potential inflationary pressures despite a Federal Reserve easing cycle. However, a historically significant counter-signal has emerged: the VIX experienced a 63% decline over the nine weeks ending June 6, 2025, falling from 45.31 to 16.77, the largest such drop in its history. Research by Creative Planning's Charlie Bilello indicates that the five previous instances of the VIX falling by more than 50% over nine weeks resulted in an average total S&P 500 return of 102.14% five years later, equating to an average annual total return of 15.1%, substantially above the historical S&P 500 average of approximately 10%. This suggests that despite the recent turmoil and prevailing risks, periods of outsized volatility culminating in sharp VIX declines have historically presented strong buying opportunities, aligning with the observation that S&P 500 bear markets (averaging 286 days) are typically much shorter than bull markets (averaging 1,011 days).

Key Decisions for Investors

• The unprecedented 63% nine-week decline in the VIX, culminating in early June 2025, signals a historically potent buying opportunity for long-term investors in the S&P 500, given past instances have yielded an average five-year total return of 102.14%.
• Investors should closely monitor ongoing developments in U.S. trade policy, particularly tariff implementations and their consistency, as policy unpredictability has been a significant source of recent market volatility and could impact the market's trajectory.
• While the VIX indicator is compelling, the prevailing high Shiller P/E ratio (near 39 as of December 2024) and rising long-term Treasury yields necessitate a disciplined, long-term investment approach, potentially involving phased market entry and careful risk management.