Notes on a Round Trip

It is official: After Friday’s modest rise, the S&P 500 is up 0.5% in price terms since February 19.^[i] Not that the journey was flat. The -18.7% price index decline from the high through April 8 was wretched, especially with over half of it coming in two days, April 3 and 4—the aftermath of Liberation Day.^[ii] The 9.5% rally on April 9, after Trump paused reciprocal tariffs for 90 days, was whiplash-inducing in its own way, prompting worries that it was temporary and the other shoe would soon drop.^[iii] But stocks clawed their way back in fits and starts and have now erased the decline. We see a few key lessons.

First and foremost: There is nothing magical or significant about getting back to breakeven. This is true whether the downturn is a correction like this one (a sharp, sentiment-induced drop of around -10% to -20%) or a bear market (a longer, deeper, decline of -20% or worse with a fundamental cause). Index levels are arbitrary, and past performance isn’t predictive. We have been in this business a long time, and we have seen far too many investors treat the breakeven point as a good exit point, presuming it must be a false dawn because headlines don’t look great and there is no clarity. So they get out, miss a bull market rally, and miss returns they can’t get back without taking undue risk. It can be a severe long-term setback when you consider all the compound growth those missed returns could have generated over your entire investment time horizon.

We know headlines still seem iffy. We still don’t have clarity on whether reciprocal tariffs return on July 9, what future trade deals will look like, which tariffs will stick in the long run, whether the deal-to-make-a-deal with China will come to fruition or how long the latest impasse with Canada will last. Fiscal policy is also still in flux. And while the ceasefire in the Middle East appears to be holding for now, geopolitics are unpredictable.

But, friends, these are typical of bull markets’ proverbial wall of worry. No bull market is free of real or perceived negatives. There are always risks and fears. Stocks rise on the positive surprise—the relief—that occurs when things simply don’t go as bad as feared. If the landscape were worry-free, in our view, that would be cause for suspicion that unseen risks lurked. A worry-filled landscape as stocks regain past highs is generally pretty bullish.

Beyond that, this saga shows lesson two: how quickly stocks move. On the downside, the S&P 500 hit correction territory in less than a month. The total drawdown spanned seven weeks.^[iv] It was a gut-churning rollercoaster drop. But the ride back was also pretty darned swift. The Wall Street Journal reports it was the fastest recovery ever from a drop of -15% or worse.^[v]

This is why we always discourage readers from reacting to sharp volatility. When you sell after a sharp downturn, you crystalize those losses and run the risk of missing the recovery that would have recouped them. Selling after Liberation Day may have felt good, even smart, given the market’s wild swings and the worst-case-scenario forecasts of tariffs’ economic effects. But those wild declines were markets’ pricing in those worst-case scenario forecasts. Once those were baked into prices, any outcome even marginally better was bound to bring stocks bullish relief. And that is what happened, even as uncertainty persisted. While avoiding part of a bear market can be more fruitful, those tend to unfold much more gradually than a correction, giving you time to assess the landscape and make a carefully considered forward-looking decision, not a hasty reactionary one.

Which brings us to lesson three: Markets don’t wait for clarity. There is no all-clear signal. Ever. Stocks managed to mount a recovery despite the many lingering questions over tariffs. Those who wait for clarity when deciding when to invest generally end up waiting for Godot while the market passes them by.

And finally, lesson four: Global diversification is your friend. While the S&P 500 is only now at new highs, the MSCI World Index got there early this month. Non-US stocks weren’t immune from the correction, but they had an easier ride, likely for the simple reason that tariffs hit the imposer harder than the target. US tariffs don’t make other nations’ trade with one another costlier. Heck, many reacted by pursuing freer trade. Non-US stocks won’t always beat US, but that isn’t the point. Rather, global investing maximizes your opportunity set and enables you to mitigate country-specific risk. After a few years of US outperformance, we suspect this is an easy thing to lose sight of, but this year to date is a good reminder.