Peak to Trough to Peak – Lessons Learned in the Recent Market Downturn

Key Takeaways    

• Markets consistently recover from crises, rewarding patient long-term investors, especially if they are well diversified. 

• Don’t overlook the importance of international holdings (from many countries, industries and sizes) in a well-diversified portfolio.  

• Downturns create opportunities. Market drops enable strategic Roth conversions and stock purchases at discounts.  

Despite all the uncertainty and disruption in the news, the U.S. financial markets have recovered all the ground they lost after the tumultuous tariff announcements in early April. At one point the S&P 500 index was down about 20% from its all-time high of February. This prompted some investors to move into the perceived safety of cash or CDs, a perfectly understandable response in the face of sharp declines and unsettling headlines. Yet, as the markets rebounded, it became clear how difficult it can be to time these shifts effectively. It’s not a matter of luck—history consistently shows that some of the strongest market gains happen shortly after the steepest drops. 

Fortunately, most of our clients were well positioned to weather the tariff storm. They have a variety of bonds which helped to reduce volatility. More importantly, they have substantial holdings in international stocks and other areas of the market that aren’t included in the Dow Jones or S&P 500 stock indexes -- which many people associate with “the market.” International small value for instance, is up ~25% for the year to date, while the U.S stock market is just barely in positive territory as we go to press with this post (this is true for both S&P500 and Russell 3000 benchmarks). Our typical client’s portfolio, by contrast, is doing far better thanks to broader diversification.   Now that we’re through this most recent market downturn, what lessons can we learn?  We know that this isn’t the first time we’ve been through something like this.  And it surely won’t be the last.  So how can we prepare ourselves for the next time we see something like this occur? 

The main lesson here is that diversification matters. Diversification really helps mute the roller coaster experience that so many U.S. investors endured earlier this year. Of course, this rapid “peak to trough to peak” phenomenon is nothing new. We saw a nearly identical occurrence during the early days of COVID in 2020. Those were scary times to be sure. Many people felt the world was coming unglued and took their money out of the market, which briefly declined by a jaw-dropping 30% between mid-February and mid-March of 2020. But the market roared back soon after and those sitting on the sidelines missed out.  And ended that year up about 13%!

We've seen this before and we’ll see it again. During times of crisis, it’s important for people to zoom out and look at the big picture. If they do, they’ll see that over longer periods of time markets continue to go up. Even for people who are retired, we have a plan in place that will help them get through periods of extreme volatility. If they're drawing down from their accounts and we're in a market downturn, we can sell bonds to raise cash for them without impacting the rest of their portfolio. We have many other tools at our disposal when certain environments pop up. We're always here for you when the headlines are screaming doom and gloom. We can be a trusted sounding board when many of your friends, relatives and the news media are starting to panic.  

It's okay to feel nervous when the markets are erratic. The “fight or flight” response is part of our human DNA and it’s what tells us to run from danger. But study after study shows that investors who have the courage to hold their ground during difficult times are handsomely rewarded. For instance, over the first days following President Trump’s April 2 tariff announcement, the S&P 500 lost more than 12% -- a decline rarely seen outside of early Covid and the subprime mortgage crisis of 2008. But after Trump announced a 90-day pause on the reciprocal tariffs for “non-retaliating” countries, the S&P saw its best daily performance in nearly 17 years, with a 9.5% gain on April 9^th alone. At the same time, the sell-off in Treasuries stabilized and U.S. stocks are now within two percentage points of their all-time highs.  While there’s been lots of talk about tariffs leading us into a recession, just remember that recessions aren’t necessarily bad for the stock market. In more than half of the 31 U.S. recessions since the Civil War, stock-market returns have been positive with an average annualized cumulative return during those periods of +9.8%. 

Opportunities During Tumultuous Times 

Downturns are also a great time to add some risk to your portfolio by buying stocks when they’re cheap. It’s also a good time to consider a Roth conversion so you can get strong tax-free growth when the market recovers.   For example, let's say a retired couple has $1 million dollars in a traditional IRA, and the market suddenly goes down by 20%. Now the IRA is worth $800,000. We’ve been working with the couple to convert some of their traditional IRA into a Roth IRA to reduce their taxes on drawdowns in retirement. Let’s say they took $100,000 out of their traditional IRA and converted it into a Roth IRA. When the market corrects, as it always does, the couple is now getting some of that growth tax-free in the Roth IRA and less of that growth in the traditional (taxable) IRA. By using this strategy, if the overall market recovered 20%, they’d be getting the equivalent of a 25% return after factoring in the tax savings. While timing typically isn’t important when it comes to investing, it can be an invaluable tool when looking at implementing tax strategies. 

I know each crisis feels different, but the outcome is almost always the same. During the darkest days, we never know how long it will take or how steep the dive will be, but the market always goes up over time. There’s never been an extended time period when it hasn’t.   

Conclusion 

The recent volatility has once again highlighted key lessons from market downturns: diversification matters, patience is powerful, and there are often smart opportunities amid the noise. Staying grounded during turbulent times can lead to better long-term outcomes. If you’d like to talk through your plan or see how these lessons apply to your situation, don’t hesitate to reach out. I’m always happy to help.

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  RYAN A. DUNN, CFP®, is a Wealth Manager at Novi Wealth Partners.