On-screen Disclosure:
Please read important information at the end of this program. Recorded on 4/23/2025.
Marci McGregor
No doubt about it. The current market feels like uncharted territory for many investors. Tariffs, looming trade wars and uncertainties over the future of the global economy have caused steep volatility in the stock and bond markets.
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Marci McGregor
Head of Portfolio Strategy
Chief Investment Office
Merrill and Bank of America Private Bank.
At times like these, it's helpful to take a step back and consider recent market dynamics through the lens of other volatile periods, going back to 1950. Each had unique causes and circumstances, but each was also followed by a recovery. Together, they offer important and even encouraging lessons for investors about volatility, recovery and staying invested for the long term.
Joining me for insights is Kirsten Cabacungan, an investment strategist for the Chief Investment Office. Thanks for being here.
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Kirsten Cabacungan
Investment Strategist
Chief Investment Office
Merrill and Bank of America Private Bank
Kirsten Cabacungan
Thanks for having me, Marci.
Marci McGregor
Kirsten, every prolonged period of volatility is unsettling in its own way, but there's comfort in knowing that we've been through these periods before as investors. So, talk to me about how this current situation compares with past corrections, past bear markets, and maybe, importantly, how we've recovered from these events.
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Correction: A decline of more than 10% but less than 20% from the most recent market peak.
Bear market: A decline of more than 20% from the most recent market peak.
Kirsten Cabacungan
Absolutely. This market period has been extremely volatile, and that's largely due to policy uncertainty, especially related to trade. But when you look at the maximum drawdown so far in the S&P 500, it hasn't breached the 20% decline that we typically see in a bear market. And historically, on average, bear markets can decline as much as 30%.
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Indexes have historically recovered after periods of decline.
But history typically rhymes. And after these periods of declines, we typically see the index recover. And historically, some of those shallower bear market periods have recovered on average within ten months compared to some of the deeper periods of over 30% declines, which tend to recover in three years, on average.
Marci McGregor
Thanks for that perspective. So investors may wonder what recovery looks like this time and what that path looks like. The Chief Investment Office has outlined four stages, taking us from uncertainty to recovery. Can you walk us through these stages and maybe where we might be headed?
Kirsten Cabacungan
Absolutely. So there's four stages that our team has crafted. And the first was, the reset period where, you see market volatility pick up. And that's largely, again due to the policy uncertainty.
On-screen Copy:
Phase 1: Reset
- Unforeseen event unfolds quickly
- Repricing of risk
- Liquidity needs arise
The next phase is the relief phase, where maybe some of the uncertainty lifts and we start to have a better understanding of what the final outcome on trade policy might look like.
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Phase 2: Relief
- Policy action takes place
- Significant relief rallies occur
Kirsten Cabacungan
That's helped to, you know, lead to short-term relief rallies within within the stock market. And then the third phase is the re-examine phase, where it's really about the economic and the corporate data.
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Phase 3: Re-examine
- Period of choppy trade
- Stable growth confirmation begins
What is the data actually telling us about the economy, with these new trade policies in place? And if we start to see, you know, that the data is reflecting, you know, a situation where, a recession is less likely, that likely supports a positive, rebound in markets and a risk on appetite.
And then the fourth phase is the regrowth phase, where, ultimately, fundamentals improve, the economy looks strong. And, the, the, the, the rally in equities that we've seen in the last few years continues.
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Phase 4: Regrowth
- The climb back environment unfolds
- A new normal builds
Marci McGregor
While it always feels stressful as an investor, volatility is a normal part of investing. Talk to me about some of the work that the team has done and what are the key takeaways for us as investors?
Kirsten Cabacungan
Yeah, volatility is, is absolutely normal. It's part of the investment process. It's something that we talk about with clients.
On-screen Chart:
[Chart titled "Since 1950, recoveries have followed downturns" shows periods of downturns and recoveries starting from 1950 through 2025. Text inside the chart reads, "S&P 500 Period Price Return"]
[Text under chart]
Sources: Bloomberg; Yardeni Research. Data as of April 9, 2025. For informational purposes only. Indexes are unmanaged and do not take into account fees or expenses. It is not possible to invest directly in an index. Past performance is no guarantee of future results. S&P 500 Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market.
Kirsten Cabacungan
And we looked back at periods of heightened volatility throughout history, and those have historically been positive opportunities for stocks in the years that followed. That's also the same for investor sentiment when it's extremely bearish. So right now, investors are very cautious. Measures are showing extreme bearish levels. And that's also presented positive opportunities for investors in the years that follow.
Marci McGregor
And that makes a lot of sense, right? This fog of uncertainty is lingering, so investors continue to feel a bit guarded when they think about the path ahead.
Marci McGregor
We've talked about equities, but we've also seen significant volatility in bond markets. What's your take on that?
Kirsten Cabacungan
Yeah, so over the last several decades, we've seen this secular decline in bond yields. And in the last few years we've seen that reverse, and bond yields have actually moved up, even though there's been some volatility in the recent weeks. We find that yields at this level are extremely attractive for, for investors.
Marci McGregor
And bonds are an important part of being well diversified. Talk to me a little bit about the saying, you know, we always talk about it's not timing the market, it's time in the market as an investor that matters. What does that mean to you?
Kirsten Cabacungan
Yeah. Time in the market is, is extremely important for long-term investors. Because if you would, let's say, missed out on some of the best days, that has historically, had a negative effect on equity returns over the longer term.
On-screen Chart:
[Bar chart titled, "Time in the Market Matters"
Sub head: Excluding the best days of performance for the S&P 500 drastically cuts down returns."
It shows the returns an investor could have received if they stay invested in the market versus if they took money out.]
[Text under chart]
Sources: Bloomberg; Yardeni Research. Data as of April 9, 2025. For informational purposes only. Indexes are unmanaged and do not take into account fees or expenses. It is not possible to invest directly in an index. Past performance is no guarantee of future results. S&P 500 Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market.
Kirsten Cabacungan
So if you look back since 1990, if you had missed the 50 best days, your annualized return in S&P 500 would have been around 2%, compared to 10% around 10% if you had stayed invested through that full period.
Marci McGregor
That's a really powerful history lesson there, because in periods of volatility, I think what you often see is the very best days in the market often follow the very worst days, and it's impossible to time both.
Kirsten Cabacungan
Exactly.
Marci McGregor
Let's pivot over to portfolio ideas. What should investors consider while they're simultaneously trying to navigate the short-term market volatility, but also prepare for the longer-term prospects of a recovery?
Kirsten Cabacungan
Yeah. So in the near term we do expect markets to stay choppy. There could continue to be some back and forth depending on how policy, or the final outcome, of policy. So, in the near term you know we're still emphasizing you know, playing defense and offense within portfolios, you know, focusing on high quality. But I think for long-term investors, what's important is to get back to the basic principles of having a disciplined investment process, diversification, and again, staying invested.
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Focus on basic, disciplined investment principles and diversification.
Marci McGregor
It's so important to be well diversified as we try to navigate periods of volatility like this. Kirsten, thank you so much for joining me and sharing these insights today.
Kirsten Cabacungan
Happy to be here.
Marci McGregor
We hope this video helps you keep today's market uncertainties in perspective and stay focused on your long-term goals. Keep in mind that while history suggests a recovery ahead, there's no telling precisely how and when that may happen.
On-screen Copy:
Navigating the road ahead:
- Prepare for choppy markets
- Stay diversified
- Add or rebalance as necessary
Investors should prepare for choppy markets and unexpected events in the weeks and months ahead. That means staying well diversified with high-quality equities and fixed income. Strategically adding to your portfolio as potential opportunities arise and regularly rebalancing, especially after periods of heightened volatility. Thanks for watching.
On-screen Disclaimers:
Important Disclosures
The opinions expressed are as of April 23, 2025, and are subject to change.
Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.
Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.
Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Investments in foreign securities (including ADRs) involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.
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The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., ("Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Merrill"), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
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[End of transcript]
When markets get choppy, being reminded that volatility is "a normal part of investing" can seem less than reassuring. "But, going back to 1950, though each period of volatility has had its unique causes, each was also followed by recovery,"Footnote 1 says Marci McGregor, head of Portfolio Strategy for the Chief Investment Office (CIO), Merrill and Bank of America Private Bank. Taking a look back at how markets have historically performed offers useful perspective to help investors navigate the ups and downs, she notes.
In the video above, McGregor sits down with CIO Investment Strategist Kirsten Cabacungan to explore the four phases of market recovery, from reset to regrowth, mapped out by the CIO, based on historical trends. "This market period has been extremely volatile," says Cabacungan. "But when you look at the maximum drawdown so far in the S&P 500, it hasn't breached the 20% decline that we typically see in a bear market.Footnote 2 After these periods of declines, we historically have seen the index recover — some on average within 10 months."Footnote 3