The S&P 500 dropped 10% between February 19th and March 13th (it’s now down 8.5% from the peak). By itself, that’s not newsworthy since the average intra-year decline for the S&P 500 is 14%, we haven’t had a correction since 2022, and the S&P 500 had gotten very expensive.
But to many this feels different and worse: policy chaos, weaker consumer and small business sentiment, the Atlanta Fed’s GDPNow forecasting model showing Q1 economic growth at -1.4=8%, and concerned long-time market bulls like Jeremy Siegel and Ed Yardeni. It’s gotten so confusing people are theorizing it’s a deliberate administration attempt to tank the economy before resetting it.
It’s also running counter to the President Trump narrative many espoused. Love him or hate him (there’s no third option), many thought his administration would be good for stocks, America first would keep the U.S. dollar strong and hurt international markets, and the bigger risks were to the upside, meaning higher rates and inflation.
So, what’s going on?
A bear market and recession , normal sell-off, or a growth scare which Sam Ro recently explained?
We don’t know.
And by we, I don’t mean a select few dummies who can’t figure stuff out. I mean no one knows for sure. Even Jerome Powell admitted he didn’t know where U.S. trade policy was going or how it would impact markets.
Here’s What I Know
The market is going to tank, and it doesn’t matter
I don’t know when, but it’ll happen multiple times during your working years and multiple more times during your retirement.
It doesn’t matter because a thoughtful investment strategy will survive bear markets. They’re a normal part of investing, and a properly built portfolio will ride them out. The best way to make money is to stay invested and benefit from the eventual recovery.
You can’t sidestep bear markets
Bob Pisani said it best on our Wealthy Behavior podcast:
The academic evidence is overwhelming. You cannot successfully time the markets. To time the market, you have to be right going into an investment and you have to go be right going out. And the chances that you’ll be wrong on one of those is very, very high.
What’s complicated now is that the chaotic headlines and volatility might convince you that you can time this bear market’s arrival (it’s here!). That may be true, but you’re not going to get back in on time, and the bear markets I’ve seen weren’t created by ubiquitous news headlines. The first was driven by a stock market bubble, the second by a housing bubble and credit crisis, the third by Covid-19, and the fourth when interest rates jumped from 0 – 5%.
Diversification works
You’d be forgiven for forgetting this given the U.S. large cap stock run. The S&P 500 is down about 4.5% this year. Meanwhile, developed international stocks are up 8%, emerging market stocks are up 4%, and bonds are up 2%. Some alternative investments are positive this year as well.
As the S&P 500 has pulled away from the world in terms of performance, valuation, and concentration, we’ve recommended diversifying instead of expecting the stellar outperformance to continue.
But that’s hard guidance to follow since valuations aren’t a good short-term market timing tool, and no one likes to leave a great party early. People don’t usually worry about elevated valuations when markets are doing great.
Let this hopefully brief hiccup be your warning: you need other things in your portfolio besides U.S. large cap stocks. A globally diversified portfolio balanced with bonds is up in a year when the S&P 500 is down.
