A few weeks ago, Laura and I (Sean) took our first trip as a couple since Marianne (now nearly two and a half) was born. We hopped on a flight to Chicago and spent three days wondering around the city in search of the finest meal on the Gold Coast. Three days without work, emails, dirty diapers, fussing, cooking, or cleaning. 72 hours where our time was our own again. For the first time in what felt like a long time, we relaxed. It was wonderful.
But I don’t think living like that would be wonderful 365 days a year. It’s the stress of everyday life that makes those little vacations so fantastic. Wrestling back control of your own time is only satisfying after you’ve surrendered it to your family and your work for a long period. The stressors and frustrations of daily living make those vacation days so special. If I had no responsibilities – no career, no child to raise, no chores to complete – three days like those Laura and I just experienced in Chicago would be banal. That’s the package life offers us. If you want to enjoy a vacation, you need something you’re taking vacation from. You can’t have one without the other. I think some trust fund babies try. It doesn’t seem to work for them. A lot of life works this way. Most – myself included – report they never feel better than after a hard workout. But you can’t isolate that feeling without the pain of the workout. A sense of achievement in any domain is satisfying, but only in proportion to the difficulty of the accomplishment. Participation trophies don’t feel good.
The markets offer investors a package too. The S&P 500 has returned an average of about 10% per year while experiencing – again on average – a 15% decline once a year, a drawdown of about twice that every five years or so, and on occasion something on the order of a 50% wipeout. You cannot have one (nice, happy 10% annual average returns) without the other (nasty temporary drawdowns). Importantly – one distinction most investors miss – the superior long-term returns offered to equity investors are not in spite of those nasty drawdowns, they are because of them. If there was such an investment that could consistently deliver returns on par with equities without the frequent temper tantrums the market throws, demand would drive up the price and the returns would be driven down. Such is the nature of an efficient market. The frequent declines and the superior long-term returns in stocks are two sides of the same coin.
A quick note – you may encounter “advisors” offering (read: selling) some product that offers something akin to the superior returns of equities without the temporary declines. Our advice in such situations is reduced to a singular word: run.
While the declines are frequent and necessary, there are techniques that allow us to temper their impact; namely, diversification. The S&P 500 is down 13.42% year to date through Friday’s close. The ETF tracking the “Magnificent Seven” (the only stocks anyone wanted to own the last two years) is down 24%. Nvidia, the hottest stock in recent memory, is down 30%. International stocks are up 1.25%. Bonds are up 3.69%. Diversification is known as the only free lunch in investing. When done prudently it can reduce (not eliminate!) the overall risk of a portfolio without sacrificing long-term returns.
The recent sell-off has not yet reached an infamous milestone in terms of magnitude. This has not yet (as of this writing after Friday’s close) eclipsed the drawdown during Trump Trade War 1.0 in the fourth quarter of 2018 (after which the market returned +31%, +18%, and +29% over the following three years, by the way), though it certainly may soon. What it has yet to achieve in magnitude it has certainly accomplished in speed. The S&P 500 was down 10.5% over the two trading days following Trump’s tariff announcement – the fifth largest two-day decline since 1950. The only larger two-day drawdowns occurred in October ‘87 (twice), November 08, and March ’20. Two of those – ’08 and ’20 – occurred during a cataclysmic economic backdrop, lest you fear this current iteration driven by fears of a global trade war is especially unique. After all four instances of a larger two-day sell-off than the one we just experienced, the market posted a positive return over the following one, three, and five years. The average forward one-year return after the only four larger two-day drawdowns was +40.75% with the worst being +24%.
I am going to repeat that in case you missed it.
The average forward one-year return following the only four larger two-day drawdowns than the one we just experienced was +40.75% with the worst being +24%.
The VIX is a measure of volatility in the S&P 500. The mechanics of the index’s construction are a bit complex but suffice to say it has provided a reasonable and consistent measure of market volatility since its introduction in 1993. The long-term average for the VIX is 19.5 with a standard deviation of 7.8. The VIX closed Friday last week at 45.31 – more than three standard deviations above its long-term average. The VIX – nor any other measure – should be used to time the bottom of the market. Nailing the exact bottom is and always will be impossible. We happily submit to you that neither Rory nor I nor anyone on our trading team can give you any sense of when the market bottom is in. We will, however, furnish you with this chart of the 1, 3, 5, and 10-year forward returns for the S&P 500 for the 20 other historical instances in which the VIX closed higher than it did on Friday. Hat tip to Charlie Bilello for this research:
That’s a lot of green… An average of +39% forward one-year returns with the worst being +10%. Does that guarantee the stock market will be higher one year from now? No. But it ought to make one more eager to be a buyer than a seller at present.
“This time is different” your lizard brain is likely whispering now. To which we respond, of course it is. The reason for a sudden market sell-off is always different. Sudden interest rate hikes, war, a pandemic, the global financial system collapsing… it’s always a different reason. But it never manages to permanently interrupt the great companies of America and world’s ability to innovate and increase profits; that is, the broad equity market’s inexorable trend upwards.
If you have any concerns about the markets or your portfolio, Rory and I are always happy to hop on a phone call, a Zoom meeting, or to sit down over a cup of coffee (or something stronger) at our office.
Sean Cawley, CFP®
Neither asset allocation nor diversification guarantee against investment loss. All investments and investment strategies involve risk, including loss of principal.
Content here is for illustrative and educational purposes only. It is not legal, tax, or individualized financial advice; nor is it a recommendation to buy, sell, or hold any specific security, or engage in any specific trading strategy. Results will vary. Past performance is no indication of future results or success. Market conditions change continuously.
This commentary reflects the personal opinions, viewpoints, and analyses of Resolute Wealth Management. It does not necessarily represent those of RFG Advisory, clients, or employees. This commentary should be regarded as a description of advisory services provided by Resolute Wealth Management or RFG Advisory, or performance returns of any client. The views reflected in the commentary are subject to change at any time without notice.
Sources:
YCharts
Charlie Bilello's Research: https://bilello.blog/2025/the-week-in-charts-4-6-25