As we entered 2025, we expected stock market volatility to increase after being relatively muted over the last two years. Inconsistent communication about tariffs, government policy, negotiations around the debt ceiling, and the response to foreign governments have created uncertainty and caused volatility to surge. This uncertainty has driven one of the fastest 10% corrections in the S&P 500. Below, we use charts to put today’s market in context.

 

Should I Panic?

We never pretend to know what the market will do in the short term. While the S&P 500 has returned about 10% per year since 1928, the gains rarely come in a consistent manner. Since 1928, the average peak-to-trough drawdown for the S&P 500 during a calendar year is 16%. The median drawdown is 13%. The correction in the market between February 19^th and March 13^th occurred quickly (16 trading sessions and is the  7^th fastest 10% correction since 1929), but the magnitude of the drawdown is not unusual.

 

 The Stock Market Typically Bottoms in March

Looking at the last twenty years, the S&P 500 typically bottoms on March 12^th for a given year. The trend for the year looks significantly better once the index gets the March bottom out of the way.

 

The Third Year of a Bull Market

The stock market is in the third year of a bull market from the October 2022 low. The third year of a bull market tends to be messy, and 2025 appears to follow a familiar pattern.  

 

Markets Hate Uncertainty

Consistent with the third year of a bull market, expect market volatility to persist. Volatility will likely continue until companies and investors become more comfortable with how and what government policies will be implemented. The US administration might be playing checkers, chicken, or ten-dimensional chess, but they are not communicating effectively, and it isn’t easy to understand the end goals.

 

Bloomberg recently reported (link; paywall) that three of the seven fastest 10% corrections in the S&P 500 since 1929 have happened during Trump presidencies.

 

Fortunately, there are also some positive trends.

 

Muted Inflation

Truflation tracks more than 13 million data points and has been an excellent predictor of the direction of inflation measured via CPI. The latest Truflation data indicates that inflation is back at 1.3%. Prices are rising at the slowest pace since December 2020, and actual inflation is likely below the 2% target used by central bankers.

 

US Jobs Growth has been Positive for 50 Months

 

Investor Sentiment has Lots of Headroom for Improvement

CNN Fear and Greed Indicator

 

What’s an Investor Todo

Volatile and uncertain markets aren’t fun. Investors are left to wade through a sea of conflicting data points and scary headlines, but our persistent basis is to stay invested. Making a ‘hero call’ to sell investments and go to cash is challenging because it requires a second ‘hero call’ to reinvest. The best and worst days in the market tend to cluster close together (the chart below lays out the best and worst days from 2009-19).

 

Market timers risk anchoring to their selling prices and missing years of gains. The chart below shows the devastating impact on returns of missing the best days in the market since 1930.

 

As a result, we recommend that investors save and invest consistently across market cycles. This process will allow an investor to buy more securities when the market is inexpensive and fewer securities when the market is expensive.

 

To smooth out the market cycle and reduce volatility, we recommend a barbell strategy where high-quality companies exposed to secular themes provide exposure to equity markets. The other side of the barbell is cash, actively managed fixed income and alternative investments that reduce volatility and provide ballast for portfolios. For investors in the distribution phase of their lives, the focus expands to optimize the tax efficiency of distributions.

 

Please get in touch with me for a more detailed discussion.

 

Delli (delli@cibc.com)

 

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