Some Timeless Counsel After March’s Volatility

Global markets wrapped up a challenging March last week. Amidst the multitude of headlines in financial publications we follow blaring about the conflict in the Middle East, global stocks fell -7.1% from the last all-time high on 2 March through 27 March.^[i] Some segments of the market (e.g., Consumer Discretionary stocks, down -8.2%) have fallen more sharply, but fear has appeared to weigh on other asset classes, too, from sovereign bonds to gold.^[ii] Upon entering Q2, here are a few pieces of what we consider timeless wisdom investors can use to help manage the dour sentiment.

Fear can weigh heavily in the short term, but most investors’ goals and needs are long term.

Though we emphasise the importance of thinking about markets from a rational, emotionally detached standpoint, your friendly MarketMinder Europe Editors and Editorial Staff are human. We empathise with those who express concern about how current events may affect the world, let alone markets. Videos of missile strikes, commentary about spiking energy prices and politicians’ bluster and threats dominate headlines, which can make the world appear to be a scary and dangerous place.

Against that backdrop, we understand the temptation to act with your portfolio. Doing something may feel like regaining control in a tumultuous environment, based on our interactions with investors. Should this emotion arise, we think investors benefit from taking a step back and asking themselves a couple questions.

First: Are stocks in a correction or a bear market? The former is a sharp, sentiment-driven drop of -10% to -20%. According to our studies, the panicky pullback often features a scary story that grabs headlines, akin to last year’s Liberation Day US tariff announcement. We think today’s war-related fears also fit the bill.

In contrast, a bear market is a lasting, fundamentally driven decline of -20% or more. Rather than a steep drop, our historical analyses show bear markets typically feature slow, rolling tops—think a gentle decline or a drop followed by a bounce, followed by another drop, and another bounce, etc.—that equates to an average monthly decline of around -2%. To us, the recent negative volatility looks much more akin to a correction than a bear market. It was sharp, as March’s returns show, and off of an all-time high in early March.^[iii]

The second question to ask: What is your time horizon, i.e., how long do your assets need to work for you? In our experience, it is highly unlikely most long-term investors’ portfolio’s time horizon will end in one month, one year or even a few years. Deviating from a long-term approach can end up being costly, according to our research.

Don’t Overlook Opportunity Cost

For investors spooked by regional conflict, consider recent examples of when fighting erupted in the Middle East. After Hamas attacked Israel on 7 October, 2023, the market reaction was muted, as the MSCI World fell -3.6% from 9 October – 27 October.^[iv] A month on from the Hamas attacks, global stocks had recouped those losses and were on their way to registering a 6.8% return from the date of the attack through the end of the year.^[v]

Or rewind to last year, when Israel launched widescale strikes on Iran on 13 June—a conflict that eventually brought the US into the fold a couple weeks later. Global stocks’ reaction was also muted, as the MSCI World Index was up 0.4% in the week from 13 June, but a month later, it was up 4.9% and on its way to a fine bull market year.^[vi] If you exited stocks whenever fighting in the Middle East arose and never returned because of the fear of a larger, more damaging war to come, you would have missed out on long stretches of bull market—a potentially big setback to reaching your investment goals.^[vii]

Even 2022—when Russia invaded Ukraine, sparking speculation about energy fallout similar to today’s—has some big caveats. In our view, that war was one of many factors (including inflation, supply chain worries, US Federal Reserve interest rate hikes and potential yield curve inversion) weighing on investors during that sentiment-induced, recession-less bear market (which qualifies for that label when returns are denominated in USD).^[viii] It isn’t the same environment today, in our view.

Fight Short-Term Thinking

Based on our observations, talk in financial headlines is heavily laden with day-by-day or week-to-week thinking, which amps up short-termism. We think investors benefit from working hard to reject this. Getting hung up on when the rebound will start can lead to emotional reactions to volatility if it doesn’t come as fast as you hoped.

Perhaps the bull market’s next leg up began last week. Maybe it still awaits. We don’t think anyone can know in real time, no matter the market conditions. But focussing on when the negative volatility will end—and latching on to any and every bit of noise as evidence (e.g., chart patterns formed by recent stock prices or the possibility President Trump reverses course on allegedly market-rattling policies)—misses the point. Stocks don’t wait for clarity or resolution, according to our research. We find they pre-price the probable effects on the economic drivers that may affect corporate profits—and move on. It is impossible to know when that moving on part will happen. Usually, our research finds stocks don’t wait for news. They anticipate, and we don’t think anyone can know exactly when they start. But widely watched, widely discussed rationales won’t give investors any market insight others don’t know about, in our view.

That so many now focus on reaching a quick resolution to the conflict as the catalyst for the bull market to continue speaks to how high fear is today, in our view. Again, a new bull market began amid the war between Russia and Ukraine.^[ix] Fighting there sadly continues, but cold-hearted markets have long since moved on. The world is and never will be a perfect place. The key for investors is to focus on the fundamentals underpinning the market and not to react to the noise.