Over the past several weeks, the U.S. stock market has declined approximately 10%, meeting the traditional definition of a market correction. After two consecutive years of 24%+ returns, this pullback is not unexpected—but that doesn’t make it any less unsettling.
While corrections are a normal and frequent occurrence (historically happening about once a year), this one is accompanied by an unusually high level of policy uncertainty, which has widened the range of potential economic and market outcomes – both to the upside and downside.
In fact, while the market’s absolute decline so far has been relatively modest compared to past drawdowns, it is the sheer level of uncertainty – rather than the magnitude of the selloff itself – that has been most unsettling for many investors.
When markets decline, the natural instinct is to “do something.” Selling to protect against further downside may feel like the prudent choice—but history suggests otherwise.
Successfully timing the market requires getting two decisions right: when to sell and when to buy back in.
Even if an investor had a respectable 60% chance of getting each decision correct, the probability of getting both right is just 36% (0.6 x 0.6). That’s far worse than the market’s historical 75% win rate—the percentage of years the S&P 500 has delivered a positive return over the last 45 years.
Put simply, the odds favor staying invested rather than attempting to sidestep volatility.
How We Navigate Market Volatility
Rather than trying to predict market swings, we focus on positioning portfolios to endure all market environments. Our approach emphasizes:
- Asset Allocation: We structure portfolios in alignment with each client’s goals, risk tolerance, and time horizon. Investors with lower risk tolerance already have exposure to lower-volatility assets, ensuring they can weather downturns without needing to react emotionally.
- Quality: We focus on investing in high-quality businesses—those with strong balance sheets, durable competitive advantages, and the ability to generate consistent cash flow across economic cycles. While individual stock selection is a key part of our process, we also invest in baskets of high-quality companies through ETFs and indexes, which provide diversified exposure to well-established businesses with strong fundamentals. We view both investments as resilient assets, with low odds of permanent capital impairment.
- Valuation Matters: The price you pay for an investment is a key driver of long-term returns. While market corrections can be uncomfortable, they often create opportunities to buy great businesses at attractive prices. A disciplined approach to valuation helps us avoid overpaying in euphoric markets while capitalizing on opportunities when fear drives mispricings.
- Rebalancing: Market volatility can create imbalances in a portfolio, with some assets becoming overweight while others decline in value. Regular rebalancing helps us systematically buy low and sell high, ensuring that portfolios remain aligned with long-term objectives rather than being dictated by short-term market swings.
Looking Ahead
While short-term market movements are unpredictable, history suggests that staying invested through volatility is essential to long-term success. The biggest risk isn’t market fluctuations—it’s being out of the market when it recovers. Time in the market, not market timing, is what drives lasting returns.
It’s important to acknowledge that this correction could deepen into a bear market (-20%+) if economic conditions worsen or uncertainty lingers.
However, there are also several potential catalysts that could stabilize sentiment and drive markets higher:
- Trade & Tariffs: While trade tensions have been a source of volatility, a pivot toward more constructive trade negotiations—whether through targeted tariff reductions or a renewed focus on free and fair trade—could ease economic concerns.
- Federal Reserve Policy: The Fed still has room to ease monetary conditions if economic data weakens later this year. A more dovish stance, particularly if inflation continues to moderate, could provide a tailwind for risk assets.
- Pro-Growth Policies: The possibility of fiscal stimulus, tax cuts, or regulatory relief could help offset economic soft patches, supporting corporate earnings and investor sentiment.
- Geopolitical Stability: While global conflicts have added to market uncertainty, any meaningful progress toward peace in Ukraine, de-escalation in the Middle East, or broader geopolitical stability could help restore confidence and reduce risk premiums in financial markets.
Some might view the above as wishful thinking, especially amid the current market correction, but history has shown that markets often climb a wall of worry, and positive surprises—whether in policy, economic data, or geopolitics—can emerge when sentiment is at its weakest. At the same time, we remain mindful that uncertainty persists, and markets may continue to experience heightened volatility.
Rather than trying to predict exactly how these factors will unfold, we will stay disciplined—focusing on quality investments, proper asset allocation, and valuation discipline.
If you have any concerns or would like to discuss your portfolio, please call us at (858) 755-0909.
As always, we appreciate your trust and remain committed to helping you navigate all market environments.
Sincerely,
Your Portfolio Management Team