March 2025: Market Correction

The market entered correction territory this week. The S&P 500 has fallen -10.1% since it’s high on February 19^th.

Economic uncertainty and growing recession fears are weighing on investor sentiment. GDP expectations have come down, and several Wall Street economists have lowered their 2025 growth projections. Uncertainty around trade policy and comments from the administration on a “period of transition” have led to a re-pricing in the marketplace.

The pullback has impacted market leaders the most. The Nasdaq Index, with its high concentration of Technology stocks, has dropped -14.2%. The Magnificent 7 –AAPL, AMZN, GOOG, META, MSFT, NVDA, TSLA– which have led the market in recent years, have entered bear market territory as a group, down -20%. Some high-flying stocks have been hit particularly hard, with Tesla (TSLA) down -50% and MicroStrategy (MSTR), a leveraged bitcoin company, down -44%.

More conservative areas of the market are holding up better. The S&P 500 Low Volatility Index, which focuses on more defensive (i.e. boring) names, is down only -3.3%, or roughly one-third of the general index. We’ve previously discussed the benefits of low volatility investing – especially during market downturns – in past newsletters: The Low Volatility Anomaly and The Tortoise & The Hare

Corrections Are A Normal Part Of The Market Cycle

Corrections like this are not unusual; they are a healthy part of the market cycle. The table below highlights every -10% or worse drawdown in the market since 1950.

• There have been 38 corrections and bear markets over the past 75 years – about one every two years.
• We were due for a correction; it had been slightly over two years since the last bear market ended in October of 2022.
• Of the 37 prior corrections (excluding the current one), most remained just that – corrections. Only 11 of the 37 (about 30%) turned into full blown bear markets. In 70% of cases, losses stopped at -20%.
• In corrections (-10% to -20%), the average loss is -14.2%.
• In bear markets (-20% or more, highlighted in red), the average loss is -34.6%.
• These drawdowns can last from just a few days (such as 18 days in September-October 1955) to multiple years, as seen in the generational bear markets like the 2000-2002 tech bubble burst.

Bottomline

Whether this remains a correction or turns into a bear market, we see the most risk in the market darlings of recent years – namely Technology and Communications stock, which still carry extended valuations and aggressive growth estimates.

We see opportunities in more defensive sectors – quality companies with low volatility, growing dividends, and attractive valuations.  Our portfolio is tilted toward these names, as we believe a more conservative approach can help weather any storm the market throws at us.

In market pullbacks, history suggests the best strategy is to stay the course – assuming you have a long-term investment outlook and an asset allocation aligned with your risk tolerance. (If you’d like to review your strategy, please call us). Over the past 75 years, there have been 38 corrections. But each of those corrections ended, and the market went on to new all-time highs (sometimes quickly, other times it took longer). The odds favor that happening again this cycle.

Instead of reacting to short-term volatility, we want to help you focus on your long-term goals and the investment plan you’ve put in place.   If you have concerns or questions about the market or your account(s), we encourage you to call. We’d be happy to review your holdings and share our outlook with you.

If there has been a change in your financial situation or investment objectives, or if you’d like to schedule a complimentary consultation, please feel free to contact us at (406) 839-2037.

Definitions:

Correction:     A market decline of -10% to -20%.

Bear Market:  A market loss of -20% or more.

All data is as of market close on 3/13/25.

Data Sources: S&P Global, Koyfin, Allied Calculations

The views expressed in this newsletter represent the opinion of Allied Investment Advisors, a Registered Investment Adviser. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment or services. The information provided herein is obtained from sources believed to be reliable, but no representation or warranty is made as to its accuracy or completeness. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results. Investments are not a deposit of or guaranteed by a bank or any bank affiliate. Please notify Allied Investment Advisors if there have been any changes to your financial situation or investment objectives or if you wish to impose or modify any reasonable restrictions on the management of your accounts through Allied Investment Advisors.