Some Timeless Counsel After March’s Volatility

Global markets wrapped up a challenging March yesterday. Amid the multitude of headlines blaring about the conflict in the Middle East, global stocks fell -6.8% from the last all-time high on February 25 through March’s end.^[i] Some segments of the market (e.g., Tech, down -8.1%) have fallen more sharply, but fear has weighed on other asset classes, too, from bonds to gold.^[ii] As we wrap up the quarter, here are a few pieces of timeless advice on dealing with fear.

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

Contrary to what some readers may think, your friendly MarketMinder Editors and Editorial Staff are human. We empathize with those who worry about how current events may affect the world, let alone markets. Videos of missile strikes, spiking energy prices and politicians’ bluster and threats dominate headlines, making the world seem scary and dangerous.

Against that backdrop, we understand the temptation to act with your portfolio. Doing something may feel like regaining control in a tumultuous environment. Should this emotion arise, take a step back and ask yourself 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%. The panicky pullback often features a scary story, akin to last year’s Liberation Day. 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, 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 late February.^[iii]

The second question to ask: What is your time horizon, i.e., how long do your assets need to work for you? It is highly unlikely your 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.

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 October 7, 2023, the market reaction was muted, though it is worth noting global stocks were already in a mild correction that started late that July and would end just before Halloween. The MSCI World fell -4.0% from October 9 – October 27 (and was down -10.5% from July 31 – October 27).^[iv] A month on from the Hamas’ attacks, global stocks had risen 1.5%, on their way to registering a 11.7% return for the rest of the year.^[v]

Or rewind to last year, when Israel launched widescale strikes on Iran on June 13—a conflict that eventually brought the US into the fold a couple weeks later. Global stocks’ reaction was also muted. The MSCI World Index fell -0.5% in the week from June 13, but a month later, it was up 3.9% 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.

Even 2022—when Russia invaded Ukraine, sparking energy fears similar to today’s—has some big caveats. In our view, that war was one of many factors (including inflation, supply chain worries, Fed rate hikes and potential yield curve inversion) weighing on investors during that sentiment-induced, recession-less bear market. It isn’t the same environment today.

Fight Short-Term Thinking

Talk in financial headlines is heavily laden with day-by-day or week-to-week thinking, which amps up short-termism. Work 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 yesterday. Maybe it begins in a week. Or later than that. You can never know in real time. Never. No matter the market conditions. But focusing on when the negative volatility will end—and latching on to any and every bit of noise as evidence (e.g., technical analysis or valuation levels or the possibility President Trump reverses course on allegedly market-rattling policies)—misses the point. Stocks don’t wait for clarity or resolution. 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 stocks don’t wait for “news.” They anticipate, and you can’t ever know exactly when they start. But widely watched, widely discussed rationales won’t give investors any market insight others don’t know about.

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. Again, a new bull market began amid the war between Russia and Ukraine. 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.