Staying Coolheaded Amid Stocks’ Swings

Sharp negativity struck again on Monday, as US stocks sold off -2.7%, bringing the decline since a high 13 trading days ago to -8.5%.^[i] Sharp moves like this are textbook of corrections (short, sharp, sentiment-driven drops of -10% to -20%), but they often feel like calls to action. So what to do? First, if you are feeling the urge to act, close your eyes and take a few deep breaths. Second, remember your long-term goals and why you own stocks. Third, remember the long-term returns that drew you to stocks include many, many sharp drops like this. And fourth, set your jaw and stay cool.

This is admittedly easy for us to say. We study and write about these things for a living and have seen an awful lot in our many years doing this. It can be easy to develop academic detachment. But we know investing is personal and the emotional response to volatility is real. These stretches are difficult to endure. And the accompanying scare stories make it that much more gut-churning. Words like “patience” and “discipline” sound cold and out of touch.

We will use these words anyway, because there is something else we have witnessed a lot in the investing world: people taking undue risk in order to stop feeling the pain of short-term losses. The vast majority of the time, it means selling after a downturn, crystalizing the decline, and potentially being on the sidelines as markets rebound—and reducing their long-term returns as a result. Yes, sometimes it means getting lucky and exiting early in a bear market, typically a long, deep downturn of -20% or worse with a fundamental cause. But much more common is the standard bull market correction—usually a sentiment-driven drop of -10% to -20%. These both start and end without warning, and the rebound is often as sharp as the drop. Many of stocks’ best bull market years include corrections.

So whenever volatility strikes, we don’t think the best question is, how can I avoid this? Rather, it is vital to ask, is this a correction or a bear market? Corrections and bear markets usually have differing traits. Bear markets usually start gradually, with gentle declines that mute fear and lull people into believing they are a buying opportunity. Sometimes this is because the bear market starts when investors are euphoric or very optimistic, with few worries to weigh on expectations. And sometimes it is because the market is pricing in a huge wallop (e.g., a deleterious regulatory change, egregious monetary policy error, heightened political risk, etc.) that either no one sees or everyone misinterprets as benign or even good. In either case, the vast majority of the time, the decline is normally long, gradual and grinding. Panic-inducing drops usually come at the end, when it is clear a bear market is well underway and few foresee any bottom anywhere close.

Corrections are different. They are usually shorter and sharper. They start for any or no reason, and fear reigns. Often, they come with a big scary story and forecasts of far worse ahead. Instead of calling it a buying opportunity, headlines harp on ways to cut volatility and limit your downside risk.

In our view, this downturn looks very correction-like. It isn’t a slow, rolling decline—it is a sharp shock off a high. Bear markets often average -2% per month over their entire duration, with most of the decline coming in the final third of their lifespan. This time, the S&P 500 is down -8.5% in less than a month. And fear is the dominant emotion. Fear of tariffs. Federal layoffs. A couple of weak economic reports have everyone on recession watch, even though the Atlanta Fed confirmed its real-time GDP tracker still shows growth once you adjust for non-monetary gold imports. Headlines tout high-dividend strategies, an ill-conceived strategy to cushion volatility, among many others. In our experience, with the exception of 2020 (when stocks had to quickly price sudden COVID lockdowns and the severe recession they caused), you don’t see this kind of sentiment during a bear market until very, very late.

Also, there is an important curiosity: This downturn is primarily a US phenomenon. In dollars, European stocks hit a high on Friday, March 7. They are up since US stocks’ February 19 high, too. In local currencies, European stocks were at record highs on March 3—this time last week.

This is not what you would expect if, as so many claim, the US were really at high recession risk. The US economy is a powerful gravitational force. A downturn here would likely ripple globally, which international stocks would probably pre-price. All similarly liquid markets discount widely known information simultaneously, so it isn’t right to say US stocks understand a risk European stocks are ignoring. Markets don’t work like that, in our experience. More likely, sentiment is just affecting each market differently.

So yes, we urge you to be patient and stay disciplined. Bull markets usually end with a whimper, not a bang. This is a bang. A sharp bang, indeed. Corrections can sting in the moment, but they are normal in bull markets. Healthy, even. They reset sentiment, rebuilding the wall of worry and setting the stage for the next leg up. Judging from headlines, the wall is adding more bricks.

None of this makes the pullback’s end possible to time with precision, of course. It could end today, this week, this month or later. It could be a V-shaped bottom or W-shaped. It could end as a near-correction, a shallow correction or a deeper one, like 1998. People forget now, but the correction that struck when hedge fund Long-Term Capital Management imploded in 1998 wiped out most of the MSCI World’s year-to-date gain early that October. But the recovery was lightning fast, and stocks finished that year up over 20%.^[ii]

There is a term for selling during a downturn and missing the recovery: getting whipsawed. When we counsel patience at times like this, we are trying to help you avoid getting whipsawed. Avoiding more losses in the moment might feel good. But staring down retirement with lower compound returns generally doesn’t feel good. So think about your long-term goals and your future self. Wisdom, patience and a cool head are your best friends now, in our view.