Don’t Blink

Life moves pretty fast. If you don't stop and look around once in a while, you could miss it.

What historically would have been an eventful first quarter of 2025—which saw the S&P 500 fall some 4.3%, the Dow Jones Industrial Average -0.9%, and the Nasdaq -10.3%—was immediately overshadowed by the beginning of the second. 

Gripped by the onslaught of volatility affecting global trade, triggered by the Trump Administration’s rollout of unexpectedly stiff tariffs, markets swung dramatically throughout the first week of April, with the S&P 500 at one point entering a deep correction—and the NASDAQ a bear market¹—in a matter of days. Since April 2nd’s so-termed “Liberation Day” proclamation, updates and policy changes have been flowing just as fast and as often as we’ve had to revise the title and tone of this letter (now on its third major iteration). 

On April 9th, a surprise announcement from the President indicating that the majority of recently implemented tariffs would be put on pause for 90 days (with the notable exception of those imposed on China, which were simultaneously increased) sent investors into a buying frenzy. By the closing bell, the S&P 500 posted a jaw-dropping, double-digit swing from intraday lows to end the day up a total of 9.5%, the index’s 8th best one-day return in history.² However, this was quickly followed by additional instability, with the S&P falling nearly 3.5% the next day (Figure 2). Since then, stocks have held relatively flat, though intraday undulations have persisted as markets continue to digest frequent trade-related developments.

So, what should investors make of all this volatility? Often, the best reaction is no reaction at all. As history has shown time and again, attempts at market timing usually fail—save for the handful of hedge funds that can execute millions of trades in a fraction of a second. But by and large, getting the timing precisely right is near impossible, and when it’s wrong, the effects on long-term returns can be devastating, as noted by the J.P. Morgan Asset Management study illustrated in Figure 3.

Take a $10,000 investment, fully invested in the S&P 500 for 20 years. Given an annualized total return of 10.4% for the S&P from the beginning of 2005 to the end of 2024, this initial principal would have appreciated to a little over $70,000. Such a portfolio also would have experienced—and fully recovered from—no less than eight major market corrections over this time frame. Additionally, it’s important to note that 7 of the S&P’s 10 best days from 2005 to 2024 occurred within just two weeks of the index’s 10 worst days—much like the swings we saw at the start of this quarter. Investors that pulled out of the market in response to a downturn may very likely have missed the subsequent “rebound” that followed shortly after. And as you can see, missing just the 10 best days of S&P 500 performance over a 20-year period can more than halve a portfolio’s appreciation over time. The effects of staying out of the market even longer, or potentially making well-intentioned but poorly timed portfolio changes, can be disastrous, effectively taking what was a robust two decades of stock market performance and turning it into a net loss. Sure, avoiding the market’s worst days can also have profoundly positive effects on performance, but the likelihood of accurately gauging exactly when stocks will reverse course is slim to none, especially amid heightened geopolitical erraticism these days.

Prudent investors also realize that corrections come and go as part of the normal market cycle. As we noted in our Spring 2022 post, downturns are frequently short-lived, with full recoveries achievable within a year’s time in all but the most extreme cases. Refreshing our research from three years ago, data continues to show that even sharp, double-digit losses can be erased in a matter of months—but only if portfolios remain positioned to ride out the full cycle (Figure 4).

Constructing portfolios in anticipation of drawdowns and unexpected shocks also gives investors a port in the storm when volatility strikes. Completing the “heavy lifting” of insulating investments from major declines well in advance avoids having to make untimely adjustments when others may be forced into selling. Sometimes, this defensive posture can feel like a drag on performance when the “bulls” march forward. But when the “bear” arrives, investors holding a high-quality, diversified basket of stocks with reasonable valuations will be rewarded for their patience.

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¹ By traditional definitions, a correction is a decline of 10% or more from recent highs, while a “bear market” occurs when the decline exceeds 20%.

² The S&P’s performance on April 9, 2025 actually tied—down to the hundredth decimal—its performance from nearly 92 years ago, on April 20, 1933, the index’s 5th best day at the time.