The ASX 200 was up 5% yesterday. Here's what happens next

(Note: Performance reflects price changes, not total returns.)

Big rallies only occur during crisis

• The early 1980s were marked by stagflation — high inflation combined with stagnant economic growth — triggered by the 1979 oil crisis after the Iranian Revolution.
• The 1987 crash, known globally as Black Monday (October 19, 1987), witnessed a 25% crash for the All Ordinaries.
• The 1997 Asian Financial Crisis hit several key Australian trading partners like Indonesia, South Korea and Malaysia. As Asian demand slumped, commodity prices fell, dragging down mining stocks.
• Then came the 2008 Global Financial Crisis and, more recently, the 2020 pandemic

What history says about big rallies

In the short-term, the outlook is underwhelming and volatile following historic rallies. Average and median returns, along with the percentage of positive outcomes, all trend negative. In the month that follows a big bounce, the S&P/ASX 200 is down an average 2.4% and positive only 40% of the time. This choppy performance reflects the lingering uncertainty and volatility triggered by the underlying economic shock.

However, the picture tends to brighten after six months. By then, the worst is typically priced in, and central banks often step in with interest rate cuts or fiscal stimulus to steady the ship.

What if it's a recession?

Buying into rallies like those in late 2007 or early 2008, for instance, would have left investors down 5-30% a year later. In such cases, these sharp bounces become selling opportunities rather than buying signals.

The 90-day tariff pause still yields uncertainty. It could pave the way for a broader trade truce — or lead to renewed disputes with major partners like the EU, Vietnam, and India. Meanwhile, the U.S. and China, the world’s two largest economies, are locked in an escalating tariff war, with rates now at 125% and 84%, respectively.

Goldman Sachs briefly shifted its base case to a recession forecast last night, only to revert to its prior non-recession outlook after the tariff pause was announced.

The bottom line

What’s clear is that, in hindsight, these events often mark compelling long-term buying opportunities — provided a recession doesn’t take hold. But navigating this tightrope is the real challenge.