History says buying the stock market dip will pay off as fear turns into greed

• Investors suffering through this brutal market selloff may have a reason for hope.
• History suggests that US stocks tend to rebound strongly after big crashes.
• A strategy chief says to expect a sudden relief rally in the coming weeks.

One of the worst stock-market crashes ever may seem like it's getting more serious by the day, but history suggests that its days could be numbered.

Global markets are melting down in response to President Donald Trump's tariff policy, which was more extreme than anyone on Wall Street predicted. A recession or stagflation, where economic growth slows while inflation accelerates, are now treated by some as an inevitability.

Tariff-driven turmoil has led to the S&P 500's fourth-worst two-day span in the last four decades. US stocks shed 10.5% across Thursday and Friday, which trails only the Black Monday crisis in 1987, a 12.4% plunge in late 2008, and a 13.9% nosedive in March 2020 as the most severe multi-day downturns since 1980, according to strategists at BMO Capital Markets and Truist.

However, those past downturns also teach that stocks will shake off these losses. The market's average gain in the 12 months after those crashes was a staggering 36.3%, BMO found.

Truist's chief market strategist, Keith Lerner, came to an equally encouraging conclusion: Within a dozen trading days of each of those downturns, US stocks rebounded by 9% to 15%.

"This is not the time to be selling into panic," Lerner said in an interview on Monday morning.

Greed may surpass fear soon

When the market moves like this, it means that investors were caught flat-footed. Fund managers are scrambling to reposition for a scenario they were seemingly unprepared for.

Animal spirits are roaring, in the opposite way that they were in the wake of Trump's victory. Overwhelming optimism has shifted to pessimism: first gradually, and then quickly.

"Fear and greed change very quickly in the market," Lerner said. The strategist later added that volatile market swings, like a brief rally on Monday, are "a battle now between fear and greed."

Although it's futile to predict exactly what's next for stocks, Lerner suspects that selling will slow in the coming weeks, based on his research of how markets respond to selloffs and recessions.

During recessions, US stocks have fallen by an average of 29% and a median of 24%, Lerner said. The S&P 500 is already down 19% from its high, which implies that the market is pricing in a two-thirds to 80% chance of an economic downturn.

A contraction is certainly possible, Lerner said; his firm has it as a 50-50 proposition as of now. But a recession still isn't a guarantee yet, and prematurely declaring that it is can backfire.

"I'm not saying this is over," Lerner said. "I don't think we're going back to new highs anytime soon. I think it's going to be a pretty choppy back and forth, but I don't think this is the time to become more negative."

That optimism is notable, given that Lerner downgraded US equities to neutral in late February — just as the S&P 500 peaked. Since then, the market's mood has completely changed.

"The riskier part was almost when you had none of this priced in back in February," Lerner said. "Now, at least, you're pricing in some of this uncertainty."

There's already been a 50% retracement of the bull market that began in late 2022, which Lerner identified as a significant technical support level. If he's right, stocks may enjoy a bounce.

A relief rally might not last, but at this point, even a brief respite from the relentless selling would be welcome news.

"We think we're setting up for at least some type of counter-trend rally," Lerner said. "It may be short, but this is not the time that we would be selling into."