Keep Calm and Carry On

Answer: The answer depends on how your investments are allocated, what your cash flow needs are in the short-term and long-term, and what your appetite is for risk. Market declines are unsettling and can rattle even the most experienced investors. The well-known British slogan Keep Calm and Carry On is framed and intentionally placed on a wall in my office for clients to see during review meetings. The slogan embodies the British “stiff upper lip” stoicism and was introduced by the British Ministry of Information sometime during the end of June and early July 1939 in the event of a World War. As we know, WWII began September 1, 1939, and ended September 21, 1945. This timeless sentiment is sound advice today. 

Recent weeks have seen financial markets shaken and stirred by swirling news headlines, tariff whiplash, and rising economic uncertainty. The recent market decline helped quell the “irrational exuberance” a term coined by Fed Chairman Alan Greenspan on December 5, 1996. Slowed growth is still growth, and the reduction of over-exuberance was due. 

Volatility was at its highest levels since last August with markets officially in correction territory, down approximately 10% from the recent peak. It’s crucial to maintain perspective, avoid panic, and resist emotional actions in your investment portfolio. 

Volatility is a normal part of the market journey and can be put into perspective. Here are reasons for that and why this pullback will likely be short-lived. 

Growth Scare More Likely a Soft Patch Than a Recession: Between tariffs, DOGE’s cost-cutting efforts, and sweeping government layoffs, sentiment has soured quickly. Uncertainty could lead to a 'self-fulfilling recession' if consumers and businesses both cut back on spending, but that’s not happening yet. Fed Reserve Chair Powell recently downplayed the sentiment factor, noting that it hasn't reliably predicted consumption growth in recent years. The labor market remains healthy, consumers are still spending, lower yields should boost housing, and a potential ceasefire in Ukraine could lower energy prices, all factors keeping the economy stable. These factors suggest the soft patch should prove short-lived, with growth remaining around 2% in 2025.

Slow Growth Could Cause Fed Easing on Rates: Recent growth concerns and improving inflation data have brought rate cuts back into consideration. One, two, or even three rate cuts are anticipated by analysts during 2025. The key here is that the Fed has tools to support the economy if necessary. Fed Chair Powell might adopt a more accommodating tone given the recent slowdown in economic momentum and progress on inflation. If this happens, it could boost sentiment and support both the economy and financial markets.

Irrational Exuberance Has Been Washed Out: The recent market decline has calmed much of this exuberance. For instance, the percentage of bullish investors has dropped significantly in recent weeks, reaching extremely low levels. Wall Street strategists, who began the year overly optimistic, are now tempering their bullish outlooks. These signals suggest that the market may be nearing a bottom as sentiment shifts from over-optimism to fear. When such extremes occur in an abbreviated time period, it typically sets the stage for better forward-looking equity performance.

Putting The Recent Volatility into Perspective: Volatility is an inherent part of the market, and the recent decline isn’t unusual. Typically, dating back to 1980, the market experiences three to four pullbacks of 5% or more, one pullback of over 10%, and an average maximum intra-year drawdown of 13% each year. We haven’t seen a 10% pullback since August 2023, making this decline long overdue. While volatility can be unsettling, it's important to maintain perspective. Pullbacks are inevitable, but investors who stay the course and ride out the volatility, whether short-lived or more severe, are often rewarded. 

Recent declines over the past decade include the COVID downturn and the onset of the Russia/Ukraine War, presented favorable buying opportunities for long-term investors. Another key point is that time in the market is more important than timing the market. While it's challenging to remain patient during volatile periods, history shows that the probability of a positive outcome increases with the length of the holding period.

Bottom Line: Volatility is never comfortable, but history shows that panic selling during volatile periods can harm performance. With over-optimism now diminished and the economy on solid footing, we’re growing more optimistic about equity performance moving forward. Volatility is the price you pay to be in the market; stay the course, stay focused and plan accordingly. Or as the Brits say, Keep Calm and Carry On.