When In Doubt, Zoom Out
“Be quick to turn bullish, but take your time turning bearish. The market is up more than 70% of the time.”
-Larry Williams, renowned Market Technician
Recent market volatility has left investors on edge, but it’s important to take a step back and view the bigger picture. The S&P 500 has fallen less than 10 % from its February peak, with the hardest-hit stocks being those that led the rally in 2024. While short-term weakness can be unsettling, there’s historical precedent for market softness in February. Over the long term, markets have consistently trended upward, with the S&P averaging an annual return of roughly 10%. However, annual returns have averaged 22% over the last two years, 17% over the last five years, and just under 13% per year for each of the last 10 years. While the current pullback may feel significant, it follows an extended period of above-average gains, making some level of reversion to the mean a natural and expected occurrence.
Despite the message the averages may convey, not everything is falling. Of the 11 sectors that make up the S&P 500, only four of those had negative returns so far this year as of Monday’s close of business. Meanwhile, developed international equities have generated almost a year’s worth of returns in less than three months and emerging market equities are up as well. Bond prices are also climbing. The price divergence between stocks and bonds represents a departure from the synchronized movements seen last year.
All of the aforementioned data suggests that investors are recalibrating their expectations rather than reacting to a deep economic crisis. Fundamentals across the economy remain solid with below-average unemployment of 4.1% below historical averages, moderate wage growth, and few signs of cyclical sectors being stretched. Inflation remains above the Fed’s 2% target, but the market is pricing in three cuts over the next year. Finally, while geopolitical risks and policy concerns add complexity to the outlook, markets have weathered similar periods of uncertainty before and continued to march higher over time.
In the near term, market conditions may remain choppy, particularly as investors adjust to a broadening of the market (from a focus on artificial intelligence) and an uncertain policy environment. However, history shows that pullbacks are often opportunities rather than warning signs of long-term trouble. It is normal for markets to experience a pullback roughly one year out of every four. While defensive positioning may feel more comfortable in this volatile environment, staying invested with a focus on fundamentals remains our strategy at Broadway Bank. As always, disciplined investing and a long-term perspective are the keys to navigating volatility successfully.
