On April 2nd, President Trump announced unprecedented global tariffs that sent shockwaves throughout the global markets. As a result, the S&P 500 lost over 10% in two days. Though we have experienced volatility like this in the past (i.e. 1987, the Financial Crisis 2008, and Covid in 2020) is this time different? That is a question we often get from clients when events like this occur.
At McCabe & Associates, our philosophy is to understand your objectives, risk tolerances, time horizons, and most importantly your goals. We have and will continue to provide clients with guidance during volatile times, to help keep you on a path towards pursuing your long-term goals.
To revert back to, “Is this time different?” the answer is yes and no.
Yes, this volatility is being caused not by a fundamental flaw (i.e. high unemployment, raging inflation, poor corporate earnings, and slowed consumer spending) but the use of tariffs from our political leaders, which is relatively new to our country.
No, this time is not different since we witnessed extreme volatility in the short term (i.e. Covid, Market Crash in 1987, and the bond “taper tantrum” in 2018).
Another question we frequently receive during volatile times like this is “should I stay invested?” Many people feel that they should go to cash until things settle down and then they can get back into the markets. Historically this would be one of the worst decisions an individual could make, and it could significantly reduce the likelihood of them reaching their goals.
The chart below from Dimensional Fund Advisors does a good job of illustrating the harm trying to time the market can cause. A hypothetical $1,000 investment in the Russell 3000 at the beginning of 2000 would have turned into $6,604 for the 25-year period ending December 31, 2024. If you missed the best week over that period, the value of your investment would shrink to $5,511. That’s a 17% drop in value for missing 5 of 6,250 trading days over this period. If you miss the best three months, the total value falls to $4,655.
One of the main reasons that missing just a few days can have such a large impact on value is because historically the best market return days have tended to closely follow the worst days. The last couple of weeks have been another perfect example of that. From 4/3 to 4/8, the S&P 500 fell 12.1%. This was the 12th largest 4-day decline since 1950.
On the very next day, the S&P 500 gained 9.5% after a new tariff announcement. This was the 3rd biggest one-day gain in the S&P 500 since 1950. If an individual missed this day, it would have significantly reduced their long-term return.
We feel that this period of high volatility is most likely not over. There is too much uncertainty over tariffs and their impact on the overall economy. But we have experienced periods of high volatility in the past and certainly will in the future. In times like this, investors should keep their long-term goals in mind.
Should the question be, “Is it different this time and what changes do I need to make?” Or should the question be:
1. Am I on target to meet my long-term financial goals?
2. Am I diversified into the proper amount stocks, bonds, alternative investments, and the proper amount of cash holdings, based on my risk?
3. Am I able to weather the short-term volatility of the market to follow my plan?
Every investor needs to have a plan in place and strong financial pillars. If you feel that you need to review your plan and make sure you are check marking each financial pillar, please reach out to your McCabe advisor anytime to ensure you are on the right path to building your wealth bridge.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
Source: Dimensional Fund Advisors LP
Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
In USD. For illustrative purposes. Best performance dates represent end of period (November 28, 2008, for best week; April 22, 2020, for best month; June 22, 2020, for best three months; and September 4, 2009, for best months). The missed best consecutive days examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best consecutive days, held cash for the missed best consecutive days, and reinvested the entire portfolio in the Russell 3000 Index at the end of the missed best consecutive days. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
Investment products: • Not FDIC Insured • Not Bank Guaranteed • May Lose Value
Dimensional Fund Advisors does not have any bank affiliates.