Why Sitting Still Is Often the Smartest Move During S&P 500 Corrections

By historical standards, market corrections are neither rare nor unpredictable. Since 1950, the S&P 500 has experienced a correction—defined as a decline of 10% or more from a recent high—approximately every 18 months. For long-term investors, these pullbacks are part of the normal rhythm of markets, not aberrations. And despite the emotional impulse to act, the data consistently shows that doing nothing is often the most prudent course of action.

Consider the historical context: between 1980 and 2023, the average intra-year decline in the S&P 500 was roughly 13%, yet the index posted positive annual returns in about 75% of those years. In other words, volatility is not an anomaly—it’s a feature of the market. Remember also, the S&P 500 has recovered from every correction and bear market on record, eventually pushing to new highs.

Corrections tend to be short-lived. According to CFRA Research, since World War II, the average correction has lasted about four months and has seen an average decline of 13%. The majority have not turned into bear markets, which are defined as a drop of 20% or more. While bear markets are more severe and emotionally taxing, they are also temporary: the average duration of a bear market since 1946 is just about 14 months, while bull markets last nearly five times as long on average.

And yet, investors routinely sabotage their own returns. According to data from Dalbar, the average equity fund investor has significantly underperformed the S&P 500 over the last 20 years, largely due to emotional decision-making—selling during declines and buying during rallies.

One of the strongest arguments for staying invested is the impact of market timing—or rather, the cost of mistiming. J.P. Morgan Asset Management found that between 2003 and 2023, missing just the 10 best days in the market would have cut an investor’s total return by more than half. Notably, many of those best days occur within weeks of the worst days, meaning that those who sell during corrections often miss the bounce-back.

This doesn’t mean investors should ignore risks or refrain from portfolio reviews. Prudent asset allocation, diversification, and rebalancing are all key elements of long-term success. But acting out of fear during a correction is rarely rewarded. Markets are forward-looking and tend to recover well before the economic data turns positive.

A disciplined approach—grounded in history, data, and emotional restraint—has outperformed reactive strategies time and again. As Warren Buffett famously quipped, “The stock market is a device for transferring money from the impatient to the patient.”

Corrections are inevitable, but they are not catastrophic unless investors turn temporary losses into permanent ones through panic selling. The record is clear: staying the course through volatility has historically delivered superior outcomes. In investing, patience isn’t just a virtue—it’s a competitive edge.

Note: Interlaken Advisors does not offer investment or portfolio management services.

Nothing herein is intended to be investment advice. All investments involve the risk of loss, including the loss of principal. Past performance is no guarantee of future returns. The content contained in this article represents only the opinions and viewpoints of the Interlaken Advisors editorial staff.

2025 is likely to be "more of the same"

As we step into 2025, investors find themselves navigating a complex landscape shaped by recent market trends, macroeconomic factors, and historical patterns. While uncertainty is a constant, the overarching message is clear: 2025 is likely to be "more of the same," characterized by volatility, corrections, and opportunities for growth.

Market analysts widely agree that 2025 will likely extend many of the themes that defined recent years. Since the bull market began a few years ago, equity markets have enjoyed steady growth punctuated by short-term corrections.

We expect continued—but uneven—growth. Volatility is an inherent feature of financial markets, and 2025 is unlikely to deviate from this pattern. Factors such as rising interest rates, geopolitical tensions, and evolving fiscal policies will contribute to market unpredictability.

Historical precedent shows that volatility often accompanies periods of economic transition. For instance, during the 1990s dot-com boom, rapid technological advancements created opportunities for outsized gains, but also wild market swings. Similarly, as sectors like AI, renewable energy, and digital finance drive today’s growth, corrections remain a natural part of market cycles. Investors should brace for short-term uncertainty while keeping a long-term perspective.

The current bull market, which began in the wake of the pandemic-driven downturn, remains in its early stages compared to past cycles. On average, bull markets last about 6-7 years, with some extending well beyond that. For example, the post-World War II bull market lasted 14 years, while the post-2008 financial crisis rally ran for over a decade.

We believe there is room for further growth in today’s market. However, investors should remain cognizant of downside risks, such as overvaluation in specific sectors or potential economic shocks.

Market cycles often end in euphoria, when valuations are stretched and investors throw caution to the wind. By contrast, the current environment is marked by cautious optimism rather than overconfidence.

The American Association of Individual Investors (AAII) Sentiment Survey, a reliable gauge of market mood, has yet to show the extreme bullishness associated with market tops. Historical patterns, such as those observed during the 2007 peak or the late-1990s dot-com era, show that markets tend to overheat when sentiment reaches euphoric levels. The relative caution among investors today suggests that this bull market is not at its end.

Renowned investor Sir John Templeton famously remarked that "bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria." This insight remains a valuable framework for understanding where we stand in the current cycle.

The post-pandemic recovery began amidst widespread pessimism about the global economy. Over the past few years, skepticism has gradually given way to guarded optimism. However, euphoria—a hallmark of late-cycle markets—has not yet emerged, reinforcing the notion that the bull market has room to grow.

Concerns about America’s trade deficit have often made recent headlines, but history suggests that these fears are overblown. The U.S. trade deficit has been a persistent feature of the economy for decades, yet the nation’s GDP has grown substantially during this time.

For example, the trade deficit reached $676.7 billion in 2020, but GDP grew at an annualized rate of 6.7% by the second quarter of 2021, driven by strong consumer spending and technological innovation. This pattern underscores a key point: the U.S. economy’s ability to innovate and adapt far outweighs the significance of trade imbalances. Investors should focus on structural growth drivers rather than short-term trade data.

Lastly, the recent election of Donald Trump for a second presidential term introduces both unique headwinds and tailwinds for the markets over the next four years. Trump’s hallmark unpredictability makes it difficult to forecast which policies will take precedence and what their ultimate economic impact will be.

For instance, his first term saw significant tax cuts and deregulation that spurred economic growth, but also trade wars that created uncertainty for businesses. A similar mix of pro-growth policies and potential disruptions could define his second term. Investors should remain vigilant, as the unpredictability of policy shifts could contribute to market volatility while also presenting opportunities in sectors favored by the administration.

As we move through 2025, it’s essential to remain grounded in historical perspective and disciplined in an investment approach. The year will likely bring a mix of opportunities and challenges, but by understanding the dynamics of market cycles and maintaining a long-term view, investors can position themselves for success.

Note: Interlaken Advisors does not offer investment or portfolio management services.

Nothing herein is intended to be investment advice. All investments involve the risk of loss, including the loss of principal. Past performance is no guarantee of future returns. The content contained in this article represents only the opinions and viewpoints of the Interlaken Advisors editorial staff.

Market Performance in U.S. Presidential Election Years: A Historical Perspective

The S&P 500 index has historically exhibited varied performance during U.S. presidential election years, influenced by the elected party. From 1928 to 2020, the index averaged an approximate 7% return in election years. When a Democrat was elected, the average return was approximately 8.29%, while a Republican election corresponded with an average return of about 15%. These figures suggest a slight historical advantage during Republican election years, though numerous factors beyond the election itself can impact market performance. As of writing this, the S&P 500 index is currently up over 25% YTD.

Historically, the average annual returns of the S&P 500 have averaged an annual return of approximately 10.8% under democratic presidents, and 5.6% under republican presidents.

Also to note, the stock market reacts positively to reduced uncertainty. With the recent conclusion of the U.S. presidential election and clearer indications from the Federal Reserve regarding interest rate policies, investor confidence has strengthened. This clarity diminishes market volatility and fosters a more favorable environment for equities in the short term. For instance, following the 2024 election (which is still being counted), major indices like the S&P 500 and Dow Jones Industrial Average reached record highs, reflecting this sentiment.

As of November 2024, corporate profits have shown resilience, with the majority of companies reporting earnings that surpass expectations, contributing to the stock market's upward trajectory. The U.S. economy continues to expand, with real GDP growth projected at 2.6% for 2024. The unemployment rate remains low, edging up from 3.7% in early 2024 to 4.0% by the first quarter of 2025, indicating a robust labor market.

Wage growth has been steady, supporting consumer spending and overall economic health. Inflation has moderated, with the Personal Consumption Expenditures (PCE) price index expected to reach about 2.25% by the end of 2025, aligning closely with the Federal Reserve's target. The Producer Price Index (PPI) has also stabilized, reflecting balanced input costs for producers.

Although we will release our full outlook next year, looking ahead to 2025, at this time the U.S. economy is anticipated to maintain moderate growth. The Conference Board forecasts a 1.7% increase in real GDP for the year. The labor market is expected to remain healthy, with the unemployment rate stabilizing around 4.0%. Inflation is projected to stay near the Federal Reserve's 2% target, providing a stable economic environment conducive to sustained growth.

However, it is important to note that the rise in the 10-year despite the Fed lowering rates gives pause to the fixed income markets and may be telling of what’s to come. Investors may be anticipating higher future inflation and interest rates, which increases long-term yields.

While the current economic indicators are positive, investors should remain vigilant. Market corrections—defined as a decline of 10% or more in stock prices—can occur unexpectedly, triggered by specific events or shifts in investor sentiment. Given the market's recent highs, a correction within the next quarter or two is highly possible. Maintaining a diversified portfolio in 2025 and a long-term investment strategy can help navigate potential market volatility.

Note: Interlaken Advisors does not offer investment or portfolio management services.

Nothing herein is intended to be investment advice. All investments involve the risk of loss, including the loss of principal. Past performance is no guarantee of future returns. The content contained in this article represents only the opinions and viewpoints of the Interlaken Advisors editorial staff.