Cloudy Skies Begin To Clear

By Kostya Etus, CFA®, Chief Investment Officer, Dynamic Investment Management

Volatility in the markets continues as uncertainty remains for investors trying to decipher a myriad of headlines, primarily related to tariffs. That said, after a rough week last week for the market, it has come roaring back this week (as of April 24) as clarity is introduced on some key initiatives, including: 1) various reports of slowdowns, reductions and potential trade deals on the tariff front 2) the president indicating no intentions to remove Federal Reserve (Fed) Chair Jerome Powell and 3) a potential slowdown in Department of Government Efficiency (DOGE) efforts as Elon Musk transitions focus to his businesses.

A few additional considerations to keep in mind as it relates to market activity include: 1) while the market is down about 8% year-to-date (through April 24), it is still up more than 7% over the past year, and up nearly 34% over the past two years 2) over the past few weeks, when stocks go down, bonds have been going up, reigniting the traditional inverse relationship between these traditional asset classes and benefiting diversified portfolios and 3) other asset classes such as international markets, value stocks and real estate continue their relative underperformance, further benefiting well-diversified portfolios focused on the long-term.

In terms of what to expect from tariff impacts, it’s not as dire as it may seem due to: 

1. Economic Growth. Tariffs generally have two key negative implications: slower growth and higher inflation. Remember, we are coming off high levels of growth achieved in 2024. While growth may slow down in 2025, it doesn’t mean it will be negative on the year. Even if there is a single quarter of negative growth, that does not signal a recession. In terms of inflation, we are coming off low levels, so slight increases from tariffs may not derail the long-term trajectory… and, dare I say, may be “transitory”.
2. Monetary Policy. The Fed has a dual mandate, to pursue both maximum employment (healthy economy) and stable prices (healthy inflation). As a result, they may be caught “between a rock and a hard place” as they try to navigate a regime with higher inflation and slower economic growth. The Fed may react faster to rising unemployment rates and helping boost the economy in periods of weakness. Given that inflation may precede an economic slowdown, we may be on track for their planned two rate cuts in the second half of the year.
3. Stock Market. The freight train has let out a bit of steam and we may be calming down a bit. While some volatility and uncertainty may persist, focus will be more on corporate earnings, and perhaps less on headlines. While tariff implications may lower forward guidance on earnings growth, the actual earnings may remain positive given resilient consumer spending. While this may help stabilize returns, it’s important to remember the stock market was trading at high valuations before the sell-off, so a strong rebound may not be in the cards.

While there may be some rough waters ahead, it’s nice to see some rays of light starting to shine through the clouds as we achieve more clarity on the economic and geopolitical landscape. But at the end of the day, these periods are exactly why we build global, diversified, balanced portfolios for the long-term. And we expect that diversified portfolios will hold up well going forward.

What happens after the biggest daily declines?

Recent volatility has been at historic extremes which is indicative of huge market swings on any given day. In fact, in April we have witnessed one of the largest four-day declines on record — as well as one of the best days on record.

What happens to the market after these extreme days? And what can investors expect going forward based on historic trends? Let’s take a look:

1. Forward Returns after the Biggest Four-Day Declines. We experienced the 12^th biggest four-day decline for the S&P 500 ending on April 8, with a drop of 12.1%, since 1950. However, comparing the other 14 declines, we notice all of the forward returns are double-digit positive. Further, the one-year forward return is an average 34%. The three-year average is 49% and the five-year average return is an astounding 112%. It certainly seems like staying invested after these significant downturn days benefitted investors.
2. Forward Returns after the Biggest One-Day Gains. The next day after that large four-day drop, we saw the third biggest one-day gain on April 9, with a pop of 9.5%. Looking at the other 14 gains on the list, we note the average forward one-year return is 39%. The three-year average is 56% and the five-year average is 125%.
3. Whether Up or Down, It’s Always a Great Time to Invest. One key observation after the big drops is the average returns are very similar to forward returns after the big gains. It may not be surprising when you consider another interesting observation: Some of the best days are often clustered around the worst. This reinforces the importance of staying invested for the long-term and not panic selling to cash in during periods of volatility.

 Stay diversified, my friends.

 Forward Returns after the Biggest Declines and Gains
S&P 500 Total Returns 1950-2025

 

Source: Bilello. Blog by Charlie Bilello: “The Week in Charts,” 4/14/25. Past Performance does not guarantee future results.  

As always, we recommend staying balanced, diversified and invested. Despite short-term market pullbacks, it’s more important than ever to focus on the long-term, improving the chances for investors to reach their goals.