How long will this last?

May 2, 2025

“How long will this last?”

“Will markets bounce back?”

“Should I make a change now?”

These are some of the most common and understandable questions many investors are asking now. When the market drops, it’s natural to wonder what will happen next and how long it might take to feel confident in the markets and economy again.

Over the past two months, markets have fallen sharply. The S&P 500 is still down almost 10% from its February high, while the Dow has dropped over 5,000 points.

What’s driving the decline? It’s not one thing. It’s a mix of economic and political uncertainty.

Heightened trade tensions, aggressive new tariffs, public pressure on the Federal Reserve, and ambiguity around future interest rate cuts have all contributed. That cocktail of risk has pushed investors to the sidelines and sent volatility soaring. The volatility index (VIX) reached its highest level in early April of nearly 20 years.

But everyone wants to know when things are going back to normal. Or, as my kids used to say on long car rides, “When are we going to be there?”

Of course, I don’t have a crystal ball (If I did- I would have known that saying to three small children (at the time) that we would be there in 2 hours when they had no concept of time would not stop the incessant questions). And you’ve heard this more than a few times before, but it’s worth repeating: past performance doesn’t guarantee future results. Markets don’t always follow historical patterns; downturns can worsen before recovery begins. Still, looking at long-term data can offer some much-needed context and perspective.

For starters, markets tend to rise slowly and fall fast. I have always liked using a tree-climbing analogy to visualize the markets. On the way up a tree, the climber makes slow progress by picking and choosing the branches that look like they could support him/her. It takes them a few minutes to examine each branch and determine the best route to the top. However, if they grab or step on a branch that isn’t strong enough, it breaks, and they quickly fall to the ground. Nothing slow or steady about gravity.

Historically, based on data from over a century of S&P 500 returns, adjusted for inflation and including dividends, it has taken as little as six months for a 20% decline to reach its bottom. Even deeper drops, like 40% or 50%, have often found their low point in under two years.

But getting back to where we started? That takes longer. Much longer.

On average, a 20% drop has historically taken about four years to recover. A 30% decline stretches to over seven years. A 40% drawdown? Nearly nine. Ouch.

These numbers reflect the emotional challenge of investing, not just the drop itself, but the long, patient climb back to previous highs.

In other words, recoveries are less like flipping a switch and more like repairing a home after a hurricane. The damage can be done quickly, but rebuilding confidence, earnings, and momentum takes time. Hopefully, it’s not as slow as getting an insurance check after a hurricane.

For many, it can be surprising to see how long it can take for markets to fully recover. One of the phrases so many of you have heard us say over the years addresses this: “Bad years hurt you more than good years help you.” This concept is the cornerstone of how we invest.

Since the end of the Great Financial Crisis, we’ve been fortunate. U.S. markets have generally bounced back quickly from declines, sometimes in just months. That kind of speed can create a false sense of how recoveries typically work. We don’t usually get “V-shaped” recoveries where markets rally back as fast as they fell.

The pattern is clear based on nearly a century of S&P 500 data. Deep declines often take years, not months, to heal fully. And for investors who have only experienced the post-2008 era, this longer timeline can feel unexpectedly drawn out. This is why, in our portfolio construction, we are willing to sacrifice a little of the upside to avoid a chunk of this downside.

That said, there is reason to remain encouraged.

Historically, some of the most substantial returns have come after the most challenging periods. Following the ten worst calendar years since 1975, the S&P 500 delivered an average return of 17.5% one year later, compared to its average one-year return of 9.7% over the same broader period.

Over more extended periods, the results are even more striking: an average 56% return after three years and more than 200% after ten years.[1]

Now, I know you’ve heard this several times already, but here it is again: Past performance doesn’t guarantee future results. Markets don’t move in straight lines, and downturns can deepen before a recovery begins. Still, history provides helpful context and reminds us that long-term discipline is generally rewarded.

What have we been doing with the portfolio to avoid these recent drops?

Here are a few strategies we have applied on behalf of our clients as these markets have become more volatile:

• Keep a diversified portfolio: Spreading investments across regions, sectors, and asset classes reduces your exposure to any single area. Adding gold and international stocks has been an example of this.
• Avoid trying to time the market: Staying invested through downturns can yield better results than jumping in and out based on emotion. Timing means you have to get out at the correct time and get back in at the correct time to be right.
• Adding downside protection: We added inverse/short ETFs that lower volatility by going in the opposite direction of the market. When the markets are down, their prices go up.
• Not being cash poor: We raised cash back in February ahead of volatility with the idea we could either a) use it for the cash needs of our clients and b) reinvest when the time is right (that’s not right now).

We can’t avoid market declines, but we can prepare for them, navigate through them, strive to minimize their damage, and stay focused on long-term outcomes.

1. [1] Market Declines: A History of Recoveries, 2025 [URL: https://www.mfs.com/content/dam/mfs-enterprise/mfscom/sales-tools/sales-ideas/mfse_resdwn_fly.pdf