When the stock market is getting scary, here's what you should do

Stock markets regularly go to irrational extremes, and their volatility has caused economic hardship and financial pain.

- Burton G. Malkiel

Now, jubilant investors are pushing the US market to historic highs despite President Donald Trump's tariffs and tax and spending policies that will increase the level of unsustainable budget deficits.

No one can know for sure where the stock market will go next. But there are worrisome signs that investor optimism may have gotten out of hand.

The recent exuberance of investors raises the question of whether they are making the same mistakes they made in the past — errors that could prove very costly down the line. If history is repeating itself, what can we do to protect our financial futures?

In the stock market bubble of the late 1990s, investors believed the internet would usher in a golden period of extraordinary economic growth — until they didn't, sparking a recession and a roughly 40 per cent decline in the S&P 500 between 2000 and 2002.

Less than a decade later, a housing bubble led to the worldwide financial crisis and the deepest recession since the 1930s. The S&P 500 lost roughly half its value. The financial wreckage to individuals' retirement savings was so pervasive that some worried whether they ought to own equities at all.

This past spring, the stock market appeared to be in free fall as investors worried that Mr Trump's threatened tariffs, some almost as high as 150 per cent, and future tax policy would crater the economy. The S&P 500 stock index dropped by about 12 per cent in a single week following the April 2 "Liberation Day" tariff announcements.

But just as quickly, the uncertainty seemed to disappear; the tariffs were delayed, negotiations were offered and on April 9, the S&P 500 had its best day in almost two decades. The market continued to soar as the "big, beautiful" tax Bill was enacted, and tariff deals were announced with several major trading partners.