Why Stock Markets Are Falling—and What You Can Do About It

Personal finance

Apr 8

Reading time: 8 minutes

Disclaimers: 1) I am not a financial adviser, and the content in this website is for informational and educational purposes only. Please consult a qualified financial adviser for personalized advice tailored to your situation.

2) Given the volatile situation, it is important to disclose that this post was written early in the morning of April 8th (CET).

Understanding the Causes of Recent Stock Market Turmoil: What You Need to Know

It is fairly safe to say that retail investors are feeling significant anxiety during the current market downturn. From the recent stock market highs reached in mid-February to today (April 8th), the S&P500 has gone down by about 18%, with the bulk of the reduction taking place over the last three trading days alone. On April 7th, the stock market opened in many developed countries with 10%+ drops, before recovering slightly in some regions (e.g., Europe), but less so in others (e.g., Asian markets).

The strong market volatility is a result of investors reacting to the Trump administration’s policy announcement–and likely rollout–of international trade tariffs and their impact on stock markets. In today’s post, we are responding to some of the most common questions related to the latest stock market downturn. What is actually happening, what can we expect, and how can we protect ourselves both now and in the future?

I’ll try to cover some of the most asked questions I see on Google’s search engine on this subject, expecting that this may be somewhat representative of the uncertainty experienced also by our readers.The hope is that the better we understand what we are currently facing (or could be about to experience), the better we can prepare for it and the more at ease we will feel with our decisions. I am aware that some of these questions will be going back to basics, and that some of our readership will already have some of these concepts very internalized. Still, it never hurts to review your core understanding of the stock market and of your investment philosophy.

What is happening with the stock market?

As of April 7th, the US and global stock market is experiencing substantial turmoil. Headlines across major media outlets are warning about market volatility as we’ve endured three consecutive trading days with losses close to 5% each day. As mentioned above, the stock market has already dropped by 18% from its all-time highs in February.

Why are stock markets tanking? Stock prices reflect the expected future earnings and profitability of companies, and any significant change in policy or economic conditions is quickly reflected in stock prices, as market participants adjust their expectations of the future health of companies. In regards to tariffs, they impact stock prices in at least two different ways: first, it directly affects the expectation of future income, which changes how investors value a given company; and second, by creating an environment less favorable for open trade but more focused on confrontation, such as the already unravelling trade tensions with China. Others countries could follow a confrontational approach too. This combination of uncertain economic conditions and potential disruptions to global trade can lead to significant short-term fluctuations in stock prices, contributing in this case to strong stock market falls.

are stock markets crashing?

Whether the stock market is experiencing a crash depends on what we define as a crash. Normally, the term “crash” has been used sparingly over the last decades for very strong events–usually reserved for a fall of over 20% from a recent peak in a single day or over the course of a few days. According to this definition, the stock market hasn't yet reached a crash level (as of April 8th), but depending on what transpires this week we may very well enter crash territory.

My recommendation though would be to not fixate with the terminology itself, since language can strongly influence how you feel and therefore how you make decisions. More on how we can respond later.

how much more will the market fall?

I understand this is a concern for many investors, particularly for those that were close to retirement. As a word of caution, though, keep in mind that over the next few days and weeks, many experts will appear across different media outlets showcasing their collection of crystal balls. Although they will claim to have unique insights as to what will happen next, the truthful (and unsettling) answer is that nobody really knows what will happen next. Following the news too closely during these events is more likely to lead you to making mistakes than to be of any help.

Could the market recover from the recent fall? The situation is different from other market downturns. As reported by the Economist, at least the economy is facing this situation from a position of strength, and there is a posibility that this market fall could be short-lived. The current US administration is very unpredictable and a course correction and role back of the tariffs cannot be ruled out. This could occur, for example, as a result of either 1) too much stock market pain to stomach by the US administration, 2) successful negotiation on reducing trade barriers with some key countries, or 3) pressure from their own party or others to reverse the policy.

Could the market continue to fall? Absolutely, and we should brace ourselves also for this scenario. Assuming other countries follow China’s lead and announce retaliatory tariffs, an increasingly hostile trade environment will emerge. This environment would continue to be priced in by market participants, leading to further falls.

What to do when the market is crashing?

A natural impulse many retail investors have during these events is to ask themselves whether they should pull their money out of the stock market. And while this is not financial advice and every person’s situation is certainly different, we should remind ourselves of the following fact: investors often lose money during market downturns due to emotional and irrational decisions. Everyone understands the theory of buy low, sell high, yet when markets start to tank people implement the exact opposite course of action.

I get it. It can be scary, particularly if you are very close to retirement. If you aren’t though, you should likely stay the course and stick to your long-term investment strategy. Assuming there are no changes to your employment, the best approach for most investors is to avoid market timing and to continue to steadily dollar-cost average into the market (ideally into low cost, internationally-diversified index funds).

During market downturns, retail investors often panic and sell off their stocks because these events are usually accompanied by wider economic pain, often expressed too as strong job losses. If you lose your job and don’t have a suitable emergency fund, chances are high you will be forced to sell from your portfolio to cover your living expenses. If you don’t have an emergency fund, you absolutely need to start saving for one–this should be your key takeaway from today’s post. While this depends on personal circumstances and risk tolerance, a good rule of thumb is to consider having at least 6 months of cash (or similar) readily available. This will make you sleep better at night if the stock market tanks and you lose your job.

How likely is a recession in 2025?

As mentioned above, the short answer to this question is that nobody has a crystal ball, and you should be skeptic of anyone claiming to have the answer. The record is flooded with examples of renowned experts unsuccessfully predicting market crashes and recessions. The impact, of course, will likely depend on whether the announced tariffs are rolled back, whether the situation escalates, or whether there are negotiations that actually reduce barriers to trade. China already announced retaliatory measures, which could, in turn, spark further ones from the US. We can imagine fairly easily a world where other countries follow suite. In contrast, as mentioned above, there is also a scenario where the US administration decides to course correct their current actions. In this scenario, a recession would be less likely to occur.

How should I prepare for or during a stock market crash?

The best way to prepare for a market crash is to make sure you have a very solid emergency fund that can see you ride it out without selling your positions for a loss. History shows that markets always end up recovering–what is uncertain, of course, is the amount of time they take to do so. Assuming you already have a emergency fund and are still employed, the best course of action is to continue investing consistently into low, cost diversified index funds as per your investment plan. The more the market tanks, the more you will be acquiring assets at a discount.

If you are edging close to retirement, it is important to consider how you will deal with sequence of return risk (SRR) and what will be your safe withdrawal rate (SWR) in retirement, i.e., the percentage amount you can sustainably withdraw from your portfolio without fear of eventually depleting it. If you are in this situation, I recommend to read some of my posts on these topics: e.g., the 4% rule of thumb, alternatives to the 4% rule, or the variable percentage withdrawal (VPW) strategy.

Should I buy stocks when the market crashes?

As discussed, for retail investors it is best not to engage in market timing. The only exception I can think of is if you have some sort of windfall or just happen to have cash available (in a healthy excess of your emergency fund). In this situation, market falls and crashes have without a doubt presented long-term wealth building opportunities.

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