Bumpy Roads Lie Ahead

Dear Clients and Friends,

This weekend, I want to talk a little bit about the current market decline, and volatility in general. Many of you are scared right now, rightfully so. Therefore, I think a little context will help….

First and foremost, as of today (Thursday) the S&P 500 is down roughly 11% from its previous high. For context, it was down 25% in 2022, 35% in 2020, 50% in 2008, and 50% in 2002. As you can see, we’re a long way from what raised our fears in the past. One might ask, why does this time feel so much more unsettling? My hypothesis is this: we’ve had a few really horrible days instead of a long run with a slow drip, and therefore the current environment much more palpable.

Also, many people fear that the current President’s economic plan doesn’t make a whole lot of sense. Which brings me to the big question- “Is this time different?” “Yes”, of course this time is different- this is an artificially crafted decline orchestrated by an elected official with a long history of failed business dealings. Yeah, I’d say this is not something we’re very familiar with.

However, it’s always different, every single time. It was different when we experienced a massive global pandemic unlike anything the modern world had ever seen. It was different during the mortgage collapse when the strongest country in the world faced nationwide bank failure. It’s always different, and that singular notion makes this time around, not so different.

Let’s explore some of the commonalities among deep market declines so that we are equipped with knowledge enabling us to wisely navigate the current climate. To do that, I’d like to defer to some terrific research Chris Fasciano, our CFN Chief Market Strategist, presented yesterday. MORWM has presented similar research in the past because it puts into perspective why avoiding “market chasing” is a critical discipline required for any successful investor.

“Individuals who cannot master their emotions are ill-suited to profit from the investment process.” – Benjamin Graham, Father of Value Investing.

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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.

One dollar (in 1870 U.S. dollars) invested in a hypothetical U.S. stock market index in 1871 would have grown to $28,916 by the end of March 2025. This is a hypothetical example for illustrative purposes only and does not represent the performance of any specific investment. Source: Morningstar.

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.

This is a hypothetical example for illustrative purposes only and does not represent the performance of any specific investment. Source: T. Rowe Price.

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.

Source: Ned Davis Research, Morningstar, and Hartford Funds (January 2025).

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.

Data as of April 4, 2025. Past performance does not guarantee future results. Assumes reinvestment of capital gains and dividends and no taxes. Indices are unmanaged and not available for direct investment. *This column shows the S&P 500 Index’s one-day loss on the date shown in column 1. Source: Hartford Funds, Morningstar, and FactSet.

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.

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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Now is the time to revisit core discipline. For example, do you have enough money outside the stock market to carry you through a deep, prolonged recession? Do we have a “risk off” bucket that we can pull from to satisfy your monthly cash needs until things settle down? The vast majority of our clients do; it’s part of their core discipline for safety’s sake. And for those of you who may not, we know, you know, and we talk about it regularly.

No one would ever describe our investment policy as a get-rich-quick agenda. We are long term wealth builders, so we mustn’t burry our heads in the minutia of arbitrary headlines.

Because this is, as I mentioned, an artificially created economic headwind, much of our forecast models are inapplicable. So, I will not predict a market direction today. If I were forced to guess, absent any considerable reconsideration of our foreign policy, I’d say the market will continue to trend downward. However, with a single stroke of one person’s pen, everything can change. And that’s why long-term discipline must, in every way, “trump” short term obsession. (Pardon the pun- was good though, right?? 😊)

With that, we wish everyone a peaceful weekend. May your voices be heard, may your human and civil rights not be infringed upon, and may we have peace and prosperity for all of our loved ones.

-Matt and your friends at MORWM.