The Paradox of Bear Markets
The past few weeks have felt like a rollercoaster. Sharp sell-offs in stocks, the steady drumbeat of unsettling news, and the financial media’s word of the year so far: uncertainty. It's easy to get caught up in the emotional swings of the market, but it's in these exact moments when it’s most important to stay grounded. One of the more common behavioral tendencies investors have is selling their stocks after a big selloff has already occurred. That might not sound like too big of a deal – what’s wrong with taking some capital off the table during episodes of market upheaval, right? The risk is, paradoxically, you might end up missing out on some of the best days of returns.S&P 500 Daily Price Returns
In the last century of stock market history, one recurring pattern is that the largest positive daily moves (blue bars) tend to come right around the worst days (red). Narrowing it down to the 100 best and worst days, 58% of the best days in market history have occurred within five trading days of the worst, and 78% within 20 days. For what it’s worth, April 3 and 4 both qualify in that bucket of worst days, while the April 9 rebound ranks as one of the best.
The seeds of a strong rebound are often sown after selloffs, when fear and panic are at their most severe. Missing just a few of these crucial rebound days can significantly impact your long-term returns.
If you were invested in the S&P 500 from 1928 until now, you’d have an annualized price return of 6.1% (i.e. not accounting for dividends or inflation). But if you missed the 10 best days of that period and nothing else, you’d have an annualized price return of 4.9%. In other words, one-fifth of all your gains would have been lost just from missing those days. It's a tough lesson in discipline, but staying invested is essential.
Fundamentals Have Gravity
Markets can be prone to wild swings as sentiment shifts dramatically, but over the long-term, broader fundamentals are the main driver of stock market performance. Much has been written about the potential impact of tariffs, but there’s still very little visibility into how trade policy will interact with business uncertainty and retaliation from other countries. There have been some downward revisions to corporate earnings estimates over the last month, but overall they have been quite muted in aggregate and nothing like the 20-30% decline typically seen in recessions.S&P 500 EPS Revisions Since March 9
First-quarter results might show some resilience due to tariff timing, and that is indeed reflected in revisions being concentrated in future quarters. What companies communicate about the outlook is always important to investors during earnings season, but the sudden shift in the operating environment means an even greater focus on management guidance.
Given that management teams are dealing with the same uncertainty we all are, it’s hard to imagine investors will get the clarity they’re seeking on the outlook. If anything, investors may get even less guidance than usual. That might keep earnings expectations from being revised too significantly in the short-term.
An added wrinkle in the volatile trading environment has been the dramatic rise in long-term Treasury yields, with 10 and 30-year maturities surging by as much as 60 basis points since April 8. These rates are key benchmarks for things like mortgages and can even have an impact on stock valuations. Reasons for the surge are not fully clear, but some investors have begun worrying about financial market stability. Some have even speculated that the Federal Reserve might step in to calm things down.
The ongoing volatility can be unsettling, but it's important to remember that these swings are a normal part of investing. Stay informed, stay disciplined, and remember that long-term perspective is your greatest asset.
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SoFi can’t guarantee future financial performance, and past performance is no indication of future success. This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
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