Market turmoil this year has reinforced important lessons for investors on topics including behavioral reactions to downturns, diversification and coping with unpredictable policy changes.
Resist the Temptation to Sell at Market Extremes
Many investors know that selling in a falling market can be counterproductive. It locks in losses and often leads to missing out on gains during a recovery, because timing market inflection points is almost impossible. Yet, it’s hard to keep your mettle when markets are driven by fear and uncertainty.
Extreme volatility in the second quarter put even the most resilient investors to the test. Trump’s sweeping tariff announcements on April 2 sent markets tumbling 12% over the next week. But after the tariff delay was announced on April 9, global stocks surged by nearly 25% through quarter end.
History suggests that stocks have performed well after volatility peaks, in both developed and emerging markets. Our research shows that when the VIX Index of US equity market volatility reached unusually high levels between 40 and 50, returns for the MSCI World and S&P 500 averaged 37.4% and 34.4%, respectively, over the next 12 months. We believe that peak VIX levels—as seen in early April—reflect a fear of worst-case scenarios that often don’t materialize. When markets adjust to less extreme outcomes, equities typically recover. That’s why it’s important to stay disciplined in adverse conditions.
Keep Your Eye on Earnings
For us, discipline means staying focused on fundamentals. While we can’t control market gyrations and valuations, as active equity portfolio managers we can focus on our anchor of value: earnings.
Changing tariff policies affect earnings in complex ways and the first-quarter earnings season provided insight into how companies were adjusting. Some acknowledged supply chain challenges and were already accruing losses attributable to higher tariffs or lowering earnings guidance (Display). However, many companies are actively offsetting the pressure by diversifying or regionalizing supply chains, concentrating suppliers for volume discounts, increasing domestic sourcing and raising prices. More recently, as tariff headlines and geopolitical fears have moderated, earnings guidance and policy uncertainty have trended in more favorable directions.
