Following our market update on March 10th, the S&P 500 oscillated in a tight range of closing values up through the close of markets on Wednesday, April 2nd, only closing lower than March 10th levels in five of seventeen trading days and closing 1.0% higher than March 10th as of the close of markets on April 2nd.
The tariff announcements that followed the close of US equity markets on April 2nd were significantly higher than expected and the S&P 500 declined 10.5% in 2 trading days and Monday April 7th has started off with a continuation of this trend.
The S&P 500 was down 13.42% for the year and down 17.4% from its highest closing value on February 19th, as of market close on April 4th, with most of the damage occurring in the final two trading days of the week.
Equity markets are trying to come to grips with what the tariff announcements mean or could mean to economic growth and corporate earnings. If tariffs remain where announced or escalate via retaliatory tariffs, at least in the short-run recession odds are expected to increase as higher prices could slow aggregate demand, consumers could rethink spending decisions, and corporations may pause capital expenditures while waiting to see if any of the involved parties blink.
It seems there has been an impulse to sell now and ask questions later, which in the short run looks appropriate but historically such decisions are often invalidated when investors remain on the sidelines or in lower returning alternate assets well beyond the duration of equity market pullbacks and their subsequent recoveries which are often quick and powerful once they begin.
In a portfolio context, diversifiers are working much better in the current US equity downturn than could be said during the inflation and interest rate induced declines in 2022. Both US and Global ex-US Aggregate Bond indexes are solidly positive for the year whereas both were down double digits in 2022. Non-US equities are only slightly negative for the year while they were down 15-20% for developed non-US and emerging markets in 2022. The tactical equity managers we utilize and buffered equity ETFs are playing defense versus pure US equity exposure as designed as well.
For equity markets, the prospect of a recession is concerning as the last 11 recessions have included an average drawdown, meaning a decline from a pre-recession peak to an ultimate trough in the markets, of 30.6%. This would imply if the US economy does tip into a recession we may have further to fall before ultimately putting in a bottom. While this is a possibility, it is in no way assured at this point that a recession will occur and if one does, five of the last eleven recessions featured drawdowns of 27% or less which would mean we’re well over halfway to a potential bottom if a mild recession results from this government action. A more significant recession could lead to greater losses, but it is hard to envision a continuation of this harsh trade policy in the face of sharply deteriorating economic data that would accompany a more significant recession.
Additionally, some potential sources of relief include likely progress on extending tax cuts, de-regulation, Fed rate cuts in the 2H of the year and a ticking clock towards midterms which would likely increase pressure on the current administration even within the majority party to try to prevent a stinging response from the electorate.
While last week’s final two trading days were significantly negative, they did not quite register in the fifteen worst single days for the S&P 500 since 1960. Even so, a review of those worst single days of which the two-day cumulative declines would have easily surpassed all but two, highlights how well markets often recover following a washout of nervous investors with an average 30.29% return for the following 12-months and annualized returns in the low double digits for the ensuing 3, 5 and 10 year periods.
See page one of the attached PDF: CLICK HERE
Every period of steep market declines has its own catalysts and circumstances that are hard to see past in the short-run, but declines of 15% or more as we currently have, are still relatively common and on average since 1942 have occurred about every 3 years for the S&P 500 and about every 2.75 years for the Dow Jones Industrial Average (DJIA). We are certainly in the range of that pattern with the last such occurrence ending in October 2022 for the S&P 500 and September 2022 for the DJIA. (See page two of the attached PDF)
The third page of the attached PDF features a chart with the growth of $10K invested in the S&P 500 index on 12/31/1979 through 3/31/2025. You’ll see that missing the best five single day gains results in about a 60% reduction in total growth for that time period. What’s not included in that chart is that those five days occurred in exactly three time periods, twice in October 2008 during the Great Financial Crisis, twice in March 2020 during the Covid-induced sell-off, and once following the Black Monday sell-off in 1987. Violent rebounds are common during periods of extreme volatility.
The final page of the attached PDF provides the long-term timeline of the markets with bull market and bear market periods highlighted. We believe this provides a valuable visual on both the greater duration and magnitude of bull markets over the long-term which is the basis for compounding returns in equities despite periods of painful interruptions.
As always, we are here to support you and welcome calls or emails if you’d like to discuss your portfolio,
Your Planning Works Team
Written by Tim Sittler, CFP®, CAIA