By Kostya Etus, CFA®, Chief Investment Officer, Dynamic Investment Management
“When life gets you down, you know what you’ve gotta do? Just keep swimming. Just keep swimming. Just keep swimming, swimming, swimming. What do we do? We swim, swim.”
– Dory (Ellen DeGeneres), “Finding Nemo,” 2003
Market Review
We are seeing our first market correction in about 18 months (S&P 500 down more than 10%) as newly announced tariffs spark inflation and economic growth worries for investors, leading to extreme levels of uncertainty and volatility. Keep in mind, we are still in positive territory from a year ago, and up over 40% from the start of 2023; it will take more than a quarter of bad returns to derail that strong of a bull market. Additionally, the performance table below indicates a resurgence of beaten-up areas of the market including:
- Value stocks
- International markets
- Real estate and bonds
While the S&P 500 may be falling, diversified investors can rest assured their portfolios are outperforming concentrated allocations as designed and expected. The 60/40 certainly isn’t dead, and we continue to be reminded about the benefits of diversification in these volatile times.
Let’s take a closer look at the key factors impacting the market drop:
- Tariffs. Markets hate uncertainty and there is currently an abundance of it. The constantly changing and evolving trade headlines are keeping investors on their toes and making it difficult to pin down the impact any of the policies may have. And it may take time to unravel what retaliations or negotiations may come out of this global trade war. The main question is, has uncertainty peaked? Meaning going forward, any clarity on outcomes (whether good or bad) may be beneficial for reducing market volatility. Furthermore, the policy agenda may soon shift to pro-growth measures. While most of the rhetoric so far this year has been on reducing government spending, going forward, we may begin to see more of the pro-growth agenda such as tax cuts and deregulation which are more market-friendly policies.
- Inflation. All else equal, tariffs do tend to be a drag on economic growth and put upward pressure on inflation. However, with that said, the U.S. economy is less reliant on trade compared to some of our trading partners. Trade accounts for about 25% of U.S. gross domestic product (GDP) versus about 70% for Canada and Mexico. Additionally, and perhaps most importantly, if tariff driven rising inflation leads to economic weakness, it may help get the Federal Reserve (Fed) off the sidelines and back into the rate-cutting game.
- Economic Growth. First, a reminder that we are coming off a very good economic year with GDP growth of 2.8% in 2024, so it’s natural to see some weakness as we come down to more normal levels. Second, we had another great employment report for March with the number of new jobs beating estimates and unemployment in line with expectations at a healthy 4.2%. Lastly, interest rates are still at elevated levels and the Fed has plenty of ammo to lower rates as needed to support the economy and labor market if trade tensions escalate.
Despite some of the headwinds apparent in the markets, several fundamental drivers of market returns remain in place, including: a healthy labor market, continued growth in corporate profits, and an accommodative Fed which remains in a rate-cutting cycle.
This is a crucial time to remember the downfalls of making emotional investment decisions, including that staying invested in the market for the long-term has been proven to be a better strategy than trying to time getting in and out.
READ ON for the top three reasons to stay invested during these volatile times.
Asset Class Returns through Q1 2025
Source: Morningstar Direct as of March 31, 2025. Past performance is not a guarantee of future results.
Top 3 Reasons to Stay Invested
- Large Market Drops are Common, but Yearly Returns are Often Positive
- Time “In the Market” Is More Important than “Timing the Market”
- Bear Markets are Painful, But Bulls are Powerful
- Large Market Drops are Common, but Yearly Returns are Often Positive
The train that’s generally moving up a mountain needs to let out some steam now and again to prevent more serious problems. Going into 2025, the market may have been overheating from strong performance with the AI boom and is now releasing some of that pressure by coming down to more stable levels. As such:
- Market drops are normal: As a gentle reminder, the S&P 500 was up 25% in 2024 and 26% in 2023. Historically, a market drop of 10% happens just about every year and a drop of 20% happens about every six years. Investors sometimes get comfortable in the good times and forget to expect a bit of market turbulence now and then on their way up the mountain.
- Markets are cyclical: Market performance is often overexaggerated on the upside due to excessive expectations and is then overly disappointed as it reverses course. This is why the market is volatile and doesn’t simply move in a straight line. The AI boom exuberance may have been overdone in 2024, but recent negative market performance may be excessive also. Meaning the market may be already pricing in worst case scenarios for high inflation, low growth, high food and energy prices, continued geopolitical conflict, etc. Going forward, any potentially favorable news, or even “less bad” news, may shift the tide back to the upside. Historically, after a market decline of more than 10%, the forward looking one, three and five-year returns are close to, or above, positive double-digit growth.
- Market drops don’t translate to calendar year losses: Looking at the chart below, in any given year, there is a market drop at some point within that year. These losses can be significant — 34% drop in 1987, 28% drop in 2009 and 34% drop in 2020 (remember COVID?). What do they all have in common? The calendar year return for all those years were positive. Moving out of the market in any one of those years could have led investors to miss out on significant returns. Historically, while losses do happen as a normal part of the market, the market tends to trend upward over time and most years it ends up on the positive side.
S&P 500 Annual Return and Max Drawdown 1980 to 2024
Source: J.P. Morgan Asset Management Guide to the Markets 1Q 2025 as of Feb. 28, 2025. Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2024, over which time period the average annual return was 10.6%. Guide to the Markets – U.S. Data are as of February 28, 2025. Past performance is not a guarantee of future results.
- Time ‘In the Market’ Is More Important than ‘Timing the Market’
Primarily, market timing is difficult because you must get it right twice! Once on the way out, and then again on the way in. It’s hard enough to get one of those right; the probability of getting them both right isn’t in favor of the investor.
As we saw post the COVID crash of 2020, the market can have a very quick snap back. If you miss out on any of that rebound, you could be locking in the losses and deteriorating your long-term returns, which could be a detriment to your lifelong investment goals. The chart below shows the potential impact of not being invested in the market for various periods of time. Key points:
- Staying Invested: If you stay invested for the full 20-year period of the analysis, your return is close to 10% per year.
- Timing a Little: If you tried to time the market and missed out on the 10 best days, the annual return was almost cut in half.
- Timing a Lot: If you missed about a month of top days (30), you essentially returned nothing.
Time ‘In the Market’ More Important than ‘Timing the Market’
S&P 500 Returns Excluding Top Days 2002-2021
Source: Schwab Center for Financial Research with data provided by Standard & Poor’s.
Return data is annualized based on an average of 252 trading days within a calendar year. The year begins on the first trading day in January and ends on the last trading day of December, and daily total returns were used. Returns assume reinvestment of dividends. When out of the market, cash is not invested. Market returns are represented by the S&P 500® Index. Top days are defined as the best-performing days of the S&P 500 during the 20-year period. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is not a guarantee of future results.
- Bear Markets are Painful, But Bulls are Powerful
Fears of a global trade war, higher inflation and economic slowdown are certainly headwinds for the markets, and we may be nearing a bear market for the S&P 500 (20% drop). However, there are a few important factors to consider:
- Bull vs. Bear Strength: In the average bear market, the S&P 500 loses about a third of its value (-33%). This may seem painful, until you consider that the average bull market almost quadruples your value (+265%). That average positive return is eight-times higher than the negative one. The odds are certainly in favor of the long-term investor.
- Bull vs. Bear Length: The average bear market lasts about one year. This may seem painful, until you see the average bull lasts five and a half years (67 months). With bulls lasting over five-times as long as bears, the odds continue to favor the long-term investor.
- A Long-Term View: It’s important to remember bear markets are a normal part of a growing market and not something to be afraid of over the long-term. Looking at the chart below, you can see that bears do happen regularly but are overshadowed by the overwhelming length and strength of historic bulls. The stock market has a strong tendency to go up over the long-term and in volatile times it’s important to take a step back and look at the big picture.
Stay diversified, my friends.
Bear Markets are Painful, But Bulls are Powerful
History of Bull and Bear Markets – S&P 500 1949-2023
Sources: Capital Group, RIMES, Standard & Poor’s. Includes daily returns in the S&P 500 Index from 6/13/49–6/30/23. The bull market that began on 10/12/22 is considered current and is not included in the “average bull market” calculations. Bear markets are peak-to-trough price declines of 20% or more in the S&P 500. Bull markets are all other periods. Returns are in USD and are shown on a logarithmic scale. Past results are not predictive of results in future periods.
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.
Important Disclosures
This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives. This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance or avoid loss. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way. Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed. For additional information, please refer to FD Wealth’s Form ADV Part 2A Brochure publicly available on the SEC’s website (www.adviserinfo.sec.gov) or by contacting us at info@fdwealth.net.