Markets often climb a 'wall of worry.' This phrase describes how stocks tend to rise even when investors are fixated on negative headlines. Despite strong market performance, there is always something to be concerned about. No matter how good recent returns have been, there's seemingly a new reason for investors to question whether now is the “right time” to invest.

Recent sentiment data suggests that investors are feeling more uneasy, making the ‘wall of worry’ even taller. One widely followed measure comes from the American Institute of Individual Investors (AAII). Each week, the organization asks people how they think the market will perform over the next six months. The results, which are published weekly, jump around sporadically and often do not provide a particularly useful signal. When readings start to push to an extreme level, however, it’s worth taking note. According to the AAII, sentiment has recently declined to a notably pessimistic level.  

Source: American Association of Individual Investors, from 12/31/1987 to 2/13/2025. Bull vs Bear Spread represents the percentage of individuals with a bullish outlook less the percentage with a bearish outlook.

There are a variety of reasons for investors to be uneasy:

• Tariffs/trade war
• Rising inflation/higher for longer interest rates
• The launch of DeepSeek/potential over-investment in AI infrastructure

Collectively these items have been dominating the headlines, and each has the potential to shape the direction of the market. The challenge, of course, is that there is no way to know how the future will unfold for any of them. Will one of these sources of fear and uncertainty be the catalyst for the next market correction? It is entirely possible, or perhaps the seeds for the next downturn are not yet visible. It’s also possible that strong momentum in the labor force, consumer spending, and corporate earnings growth continue unabated.

With sentiment in steep decline, it’s a good time to remember that corrections are both common and necessary for long-term market growth. Regular readers of the Market Update know that we are not in the business of forecasting. While we can’t predict what lies ahead, history can provide valuable perspective. The table below highlights every market drop of at least 5% since the Financial Crisis in 2008/09.

A few key takeaways:

• The market has declined by 5% or more on 32 occasions since March 2009.
• The median selloff lasted 27 days and saw prices fall -7.7%.
• Each decline was driven by different headlines, none of which provided clear timing signals for investors.
• The market recovered from every selloff, typically doing so quickly.
• Yet through it all, the S&P 500 has delivered a remarkable 16.4% annualized return since March 2009.

The above list of drawdowns will grow over time, but the specifics will only be clear with the benefit of hindsight. Fortunately, attempting to predict and avoid volatile periods is not a prerequisite for investment success. As we saw, a great outcome would have been achieved by simply ignoring the short-term noise and staying in the market. The key to success? Staying disciplined, regardless of the headlines or market sentiment.

Source: MarketWatch

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