During periods of market volatility and declines, investors get concerned. They question their long-term objectives and whether they have more risk in their portfolios than they can tolerate. These are reasonable thoughts to have at times like these.
But market declines don’t happen in a vacuum. There is always a catalyst causing investors to reconsider their outlook for future economic growth and corporate earnings. We saw such inflection points with the bank failures in 2008 and the shutdown of the global economy due to the pandemic. More recently, it was trade policy and tariffs. These big, systematic shocks lead many to question whether it is different this time.
Indeed, the accomplished investor Sir John Templeton once wrote that the four most dangerous words in investing are “this time is different.” So, why did he believe this—and what could it mean for investors and their portfolios?
Riding Out Volatility
While the catalysts for a sell-off are often different, market action usually isn’t, as it is tied to investors’ perceptions about the future path of growth and how much money American companies can earn. Although past performance is no guarantee of future results, historically, riding out downside volatility can be a prudent decision during times of uncertainty, as seen in the chart below.
Certainly, there have been some difficult times for investors, including the 1970s and the 2000s. But getting out of the market during those periods would have prevented investors from participating in future gains—unless they could time markets. During my career, I have found that doing so is difficult, if not impossible.
Staying in the Market
With that in mind, let’s examine why a buy-and-hold strategy for one’s equity allocation might be best. The ultimate reason is missing out on the performance of just a handful of positive days in the markets can dramatically affect a portfolio, as seen in the next chart.
As you can see, missing out on the 10 best days of market performance over the past 20 years dramatically reduced potential returns. If we expand that to the 20 best days of market performance, returns are further reduced. Of course, you could argue that missing the 10 worst days would also be beneficial, and you would be right. But, again, that would require the ability to time markets. Further, investors have their highest level of concern about the future path for the market during sell-offs, not at the top of the markets. Given that backdrop, buy-and-hold does seem to work when looking through a historical lens.
Part of the reason it is hard to time markets is that big moves can happen any time. We saw that on April 9, when President Trump announced a pause on reciprocal tariffs after a difficult stretch for investors. Some of the best days in the market can and do happen when everything feels the worst for investors. The chart below shows exactly when these days tend to occur.
The quote that it is “darkest before the dawn” also appears to be true when it comes to equity markets.
Finding Long-Term Opportunities
So, is there a way to tell when these inflection points are occurring? No. If there was, timing markets would be a lot easier than it is. Again, we can look at history for indications of periods where long-term investment opportunities might be found.
As mentioned earlier, catalysts for market sell-offs are always different, but market action tends to be driven by the outlook for the economy and earnings. Given that, how markets have acted during previous periods of stress and uncertainty could give us some answers to what might happen going forward.
As I wrote previously, the magnitude of the sell-off in the S&P 500 over April 3–4 had happened only five times before. But the VIX (CBOE Volatility Index) also spiked to levels that have indicated future returns for stocks could be favorable, as shown in the chart below.
Over most previous periods during the past 30 years when the VIX spiked to the degree it did on the Friday following the April 2 tariff announcement, the S&P 500 had solid performance over a longer-term view.
Is This Time Different?
History would say it is never different this time. Past performance of equity markets and the VIX during other periods of stress, as well as the magnitude of the market moves we saw after President Trump made his “Liberation Day” tariff announcement, show that times of uncertainty can provide the chance to look for opportunities to enhance portfolios over the long term.
That said, it is important to revisit investment objectives. Making sure a portfolio achieves those goals is a valuable exercise. Putting cash to work might not be the best solution if there is a need for cash in the short to intermediate term. But for those with a long-term time horizon, now could be a time to look for those opportunities. Consider emphasizing diversification, as we continue to believe that balance across asset classes and geographies is the best way to navigate any uncertainty going forward.
Markets may not have bottomed, but they will continue to be driven by headlines about progress on trade deal negotiations. And as we know, they never ring a bell at those bottoms to let everyone know it’s time to invest.
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Disclosure
The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.
The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.
The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.
One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.
The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.
The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.
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