Market Commentary: Summer 2025 - Lessons From a Whiplash Quarter

Resilience, Recovery, and the Power of Diversification

This past quarter brought plenty of ups and downs – and ultimately, higher than expected returns. It also serves as a powerful reminder of two core investment principles: (1) markets can change direction quickly, making it hard to time them, and (2) maintaining diversification remains one of the best ways to weather uncertainty. While these ideas are often repeated, they can be easy to overlook in the heat of short-term market swings, when emotion tempts investors to make decisions that could be harmful in the long run. 

From Highs to Lows and Back Again 

2025 began on a high note, with markets reaching new all-time highs. But things changed abruptly after President Trump announced a sweeping series of tariffs on April 2nd. In the days that followed, the market plummeted and by April 8th, the S&P 500 Index had fallen nearly 19%, just shy of official “bear market” territory, sparking fears of broader economic problems. 

Then, in a stunning reversal, the market rebounded after a pause was placed on the tariffs. On April 9th, the S&P 500 soared by 9.5% – the largest one-day gain since 2008, and third largest in history. By quarter’s end, the market finished near another record high with a 10.5% gain for the period. This dramatic reversal underscores a key reality: markets are unpredictable, and some of the biggest gains often follow on the heels of the worst declines. In fact, in the past twenty years, seven out of the market’s ten best days occurred within two weeks of the ten worst days. 

Bad Days Happen – Recovery Follows

Sharp drops in the market are always unsettling; there’s no denying that. But history shows these drops are temporary. Since 1945, “bear markets” have taken an average of 21 months to return to breakeven (though the actual recoveries have ranged from just three months to as long as four years). Even within a single year, volatility is common. The market has historically dropped an average of 14% at some point during any given year yet still ended the year positively 75% of the time. Market declines can feel overwhelming, but long-term success often depends on resisting the urge to react emotionally. Selling in the midst of turmoil can lock in losses whereas staying invested can lead to recovery and gains. 

The Quiet Strength of Diversification 

The other key discipline reaffirmed this quarter was that diversification matters. In recent years, the S&P 500 has been one of the best performing major indices, prompting some investors to question the value of holding bonds or international and emerging market stocks. But when U.S. markets stumbled earlier this year, other asset classes provided a stabilizing counterweight. 

For example, on April 8th when the S&P 500 was down by 19%, the Aggregate Bond Index, which is the broadest measure of the U.S. bond market, was up 1% and international stocks were down a more modest 9.2%. Even more telling, while the S&P 500 didn’t fully recover until late June, international stocks returned to positive territory by the end of April. That early recovery helped soften the blow for diversified portfolios and got many investors back into positive territory well before the U.S. markets. 

Balancing Risk and Reward

Diversification doesn’t just smooth out returns over a single quarter; it can reduce the impact of volatility across decades. Consider this, over the last 20 years, a simple portfolio made up of 60% of the S&P 500 and 40% in diversified bonds would have had an average annual return of 9.4%. An all-stock S&P 500 portfolio would have returned 11.6% over the same period, but with far more volatility, including a 37% loss in one calendar year. In contrast, the simple 60/40 portfolio would have only experienced a 13% decline. This reduced volatility means you have a more stable and resilient investing experience. For most investors, that trade-off is well worth it. 

Long-Term Habits, Long-Term Results

When markets are turbulent, it can be tempting to make dramatic shifts, but abandoning a sound plan rarely pays off. Over time, the twin disciplines of staying invested and staying diversified have proven to be remarkably effective. They help investors navigate the inevitable cycles of the market and emerge stronger on the other side.

Additionally published in North Bay Business Journal