Some Perspective—and Discipline—for Recently Choppy Markets

With Thanksgiving a week away, we are entering the traditional season of merriment, but it seems someone forgot to tell the market. After turning a 1.6% intraday rise to a -1.6% full-day drop Thursday, the S&P 500 has now fallen on five of the last six trading days.^[i] Since its last all-time high on October 29, it is down -5.0%, halfway to a correction (a sharp, sentiment-driven drop of -10% to -20%).^[ii] At times like this, we think investors are best off taking a deep breath, watching carefully and remaining patient.

Again, to this point, we are only at mini-correction or dip status. But even so, corrections aren’t calls to action. These steep slides off recent highs come and go fast and defy timing. In our experience, people see participating in a bear market (a lasting, fundamentally driven decline exceeding -20%) as the biggest risk to their financial goals. And we get why. Those declines are painful, and in the worst bear markets, it can feel like they will never end. The deep panic that reigns in their late stages can create the sense that recovery might take years and years, if it happens at all. Hence, many convince themselves acting early isn’t rash, but wise.

But no. Market history doesn’t back that supposition. Corrections and mini-corrections are much more common than bear markets. And, since good S&P 500 data begin a century ago, the median time from a bull market peak to full recovery is 26 months.^[iii] That period includes the downturn and recovery. Now, obviously, that averages out extremes on both ends, but it shows bear markets aren’t a permanent setback if you endure them. Bull markets have always followed bear markets, marching to higher highs.

The real setback is missing bull market returns. While bull markets are a remedy for bear markets, there is no reliable remedy for missed bull market returns. Miss those, and you generally can’t get them back without taking undue risk, which could end up setting you back even further from your goals. Therefore, when you are assessing market volatility, we think it is vital to do so from the standpoint of, if I get out of stocks now, what is the probability I could be wrong and miss more bull market?

This isn’t an easy question to answer. It takes care. Calm. Discipline. And, yes, time. So to reduce the risk of getting fooled by a correction, we don’t think it is wise to take defensive action for at least three months after a peak. Maybe that sounds frightfully long, but consider: Within three months, a correction will generally show itself. Corrections are steep and panicky, much like we all lived earlier this year, in Liberation Day’s aftermath. Bear markets, by contrast, tend to have slow, rolling tops. That might look like a slow, gentle decline. Or, it might look like a drop, then a partial recovery that lures more people in, then another drop, then a small rally, lather, rinse, repeat. Generally, you will be looking at an average monthly decline of -2% or so, once the ups and downs fade into a trend. Given the market is down more than twice that in less than a month, for now, the downturn looks correction-like.

Also correction-like: The volatility has a “story”—a narrative everyone latches on to. So far, the story is the alleged AI bubble, a fear that has preoccupied investors for two years and counting. This has always struck us as a false fear, given the companies at the center of it are growing earnings hand over fist, not burning through cash and racking up losses like the dot-coms 25 years ago. It also isn’t the kind of surprise that typically causes a bear market. Instead, it is the sort of fear people usually use corrections to justify. We are seeing a fair amount of that.

We have also seen chatter about September’s ok-ish jobs report, which finally came out Thursday, making another Fed rate cut less likely in December. We think that is a pretty weird supposition, given September is ancient history, but Fed sentiment is often weird. But also, this is another long-running talking point, and markets are well aware of Fed rate expectations. This bull market also had plenty of good times without Fed action, so we doubt rate cuts are suddenly necessary now. This, too, seems like a correction-like narrative.

Still, we aren’t dismissing the possibility of a bear market. Not because we think one is imminent, but because complacency and pride go before a fall. So we will be watching for a few things:

• Does the currently steep drop morph into something more gentle?
• Does “buy the dip” gain prominence commonly in headlines?
• Do stock market bulls or bears get more credibility in media coverage?
• Do big fearful narratives continue to gain traction?
• Do other negative developments surface to little notice, and do they have the power to snowball into something big?
• Do people jump on stale, backward-looking data as reason to be bullish or bearish?
• Are there signs that trouble in small, niche markets (e.g., private credit) could spill over?

So we will put our heads down, keep our eyes open, cast a wide net and keep you updated. But for now, we think investors’ best move is to practice patience and discipline and keep their long-term goals top of mind. Short-term reactions won’t get you anywhere in a correction or a bear market. Patience is the watchword.