Article last updated 12 June 2025.
Hot & Cold
As I recently discovered, one of the 'attractions' of an Alpine spa is to plunge straight from the sauna into a stream fed by water from the nearby, snow-capped mountains – possibly not everybody’s idea of fun, but exhilarating nonetheless… really! Being invested in stock and bond markets over the last few months has been a similar experience, although I’m not sure there are any associated health benefits. In just the last couple of weeks, and with US markets providing the cue for global markets, we have witnessed a two-day decline of 10.5% for the S&P 500 following the “Liberation Day” reciprocal tariff announcement, and then a one-day rally of 9.5% when they were postponed for ninety days (China being the exception).
To put that gain into context, it’s roughly equivalent to the historic average annual return from US equities, and it was the third biggest one-day increase for the index since 1950. The two biggest gains of 12% and 11% came during the Global Financial Crisis in October 2008 when policies were announced to provide support for banks which, at the time, were at risk of being declared insolvent en masse. The fourth and fifth ranked gains, both of 9%, were made in March 2020, in the middle of the covid crisis. These were in response to measures announced by the US government and central bank to provide stimulus to the economy (although not yet anything to combat the virus itself).
What is notable about all of these gains is that they were made during periods now labelled “crisis”, which tends to suggest that we might be in one now. Indeed, many of the biggest up days for stock market indices have been achieved during bear markets, which brings us back to the evergreen investment topic of holding one’s nerve when markets are not behaving well. There are any number of studies showing how much long-term return one might have missed out on by not being invested on, say, the ten best days over the last fifty years. Never underestimate the power of compounding the returns made on those days.
I am willing to concede, though, that these studies are somewhat disingenuous, because they assume that you are the world’s worst trader who perfectly times their exit from the market on the day before the huge gains. There are similar studies showing how much better you could have done by missing out on the ten worst days. However, these days often come out of thin air and are well-nigh impossible to predict and so one would be missing out on the longer-term positive trends by trying to.
I would also note that the best and worst days tend to come in clusters, with the good days often being triggered by some sort of policy response to the bad days. If anything, one should be buying more after the historically bad days, although that requires extreme levels of mental fortitude.
There are several good quotes relating to the notion that successful investors should be greedy when others are fearful, but I will settle on just one, which is attributed to, amongst others, the legendary trader Stanley Druckenmiller: “The stock market is the only market where things go on sale and all the customers run out of the store.”
Forced Sellers Meet “Greedy” Buyers
In the real world, there are always reasons why things go on sale, whether that’s seasonal items that have to be cleared to make way for the next season or, in some cases, because a business has to liquidate its stock to raise cash to pay off loans. Indeed, the US retail company TJX (which trades under the TK Maxx brand in the UK) has made an extremely successful business out of selling other retailers’ “leftovers”. Remarkably, its shares sit at an all-time high today as investors have cottoned on to the fact that it has nothing to fear from tariffs because it buys all of its stock domestically (and from companies that will already have paid the tariff if required).
There are occasions when some groups of investors are forced into liquidating their inventory too, and these are moments that we can potentially take advantage of. When ’pro-cyclical‘ forces (economic variable or policy that move in the same direction as the business cycle) that tend to drive markets to extremes are working in your favour, the secret is to stay on the ride for as long as possible. But you have to remain disciplined around valuations and not succumb to FOMO.
Fiscal stimulus or liquidity provided by central banks are the sort of forces that can drive markets higher (and lower when they are withdrawn), but these forces can be turbocharged by leverage, or the use of debt. For example, last summer we saw the’yen carry trade‘ blow up as traders who had bought US technology stocks with cheap, borrowed yen, were forced to unwind their positions when the yen started to rise.
When shares or bonds start to fall, especially in response to specific ’bad‘ news (such as the imposition of much higher tariffs than anyone was realistically expecting), we also tend to witness a rise in implied volatility (the expected daily movement of an index or security). This is another factor that can force traders to reduce their positions, because one of the key determinants of what’s known as the ‘value at risk’ of their portfolios is implied volatility. Basically, the more that their investments are expected to jump around, the less of them they should be exposed to, and so we see a deleveraging. It is usually the most crowded trades that are the biggest victims and, in the latest instance, it was largely the mega-cap technology stocks that had previously been leading global equity indices higher.
Of course, there has been some adverse shift in the ’fundamentals‘ because the tariffs will directly affect some of these companies, but that is only part of what has been driving share prices. Our clients’ portfolios are not leveraged and so we are not forced sellers. Indeed, in moments of dislocation, we have the capacity to head for the sales rack and to look for shares that have been caught up in the liquidation.
Happy Easter!
The forthcoming long weekend offers a welcome opportunity to step back from these volatile markets and reflect on what has been an extraordinary first ’term‘ of 2025. These are fast-moving markets, sadly beholden largely to the whim of one man and his acolytes. But as long as we continue to stick to our investment process, we should not be fearful. We should also note that, for all the craziness, it does seem as though markets still have the power to rein back the more disruptive elements of White House policy.
Sometimes it also helps to fall back on something reliable that has stood the test of time through thick and thin, and so I will dust off my mum’s Zesty Easter Lemon Cake recipe this weekend. One of the ingredients is raw eggs, and so its greatest moment of crisis was in 1988 when we had the big salmonella scare, which my mum defiantly ignored! It’s been an Easter staple since the 1970s. It will be around longer than any US President!
