
Markets and Economy Above the Noise: Will policy uncertainty harm the US economy?
While the setup for markets was good coming into 2025, they’ve struggled as investors assess ongoing changes to the US policy approach.
Since the early 1980s, there’s been a greater than 5% drawdown in the S&P 500 Index in every year but two.
Recession isn't imminent, but market uncertainty can cause consumers and businesses to pull back on spending.
The average time to recovery is three months from a 5%-10% downturn and eight months from a 10%-20% correction.
Market corrections and larger drops are always unsettling. Investors lose sleep wondering when the stock market will level off and (hopefully) turn around. In the midst of the recent global market sell-off, I spent the wee hours reminding myself what I’ve absorbed about market corrections and volatility over the years. Here are some comforting thoughts for when market conditions keep you up at night.
Since the early 1980s, there’s been a greater than 5% drawdown in the S&P 500 Index in every year but two (1995 and 2017).1
Policy uncertainty tends to cause market volatility and corrections. In recent weeks, tariff talk led to larger-than-expected tariffs, which were followed by a relative reprieve and escalation for China. It's been a lot for markets to digest.
Their deaths are typically the result of policy mistakes. The longer the trade policy uncertainty lasts, the bigger the potential to sentiment and economic activity. Crises tend to end with appropriate policy responses. A recession is not imminent, but the risks are rising. (Explore our Portfolio Playbook to see what our indicators are telling us on a monthly basis.)
Corporate borrowing costs relative to the risk-free rate tend to provide an early warning sign, rising significantly ahead of a recession. Currently, the spread between high-quality corporate bonds and the risk-free rate are rising but remain below average.2 In short, I believe the corporate bond market is signaling a worsening economic backdrop, but not a recession.
The average time to recovery from a 5%-10% downturn is three months. The average time to recovery from a 10%-20% correction is eight months.3
The average decline during the more-mild recessions of 1957, 1960, 1980, 1981, and 1991 is nearly 20%. The stock market recovered, on average, within one to two years.4
Investors likely know that returns can be significantly impaired if they miss the best days in the market, but they may not realize that the best and worst days tend to group together. In fact, of the 30 best days in the stock market in the past 30 years, 24 happened during the “tech wreck,” the Global Financial Crisis, and the COVID-19 pandemic.5 The market saw massive losses in response to tariffs and then massive gains a day later when tariffs were put on hold.
Long-term investors have usually been better served by adding to portfolios rather than by withdrawing money during corrections.6
On days when the headlines look dire, our action biases implore us to make changes to our portfolios. However, numerous studies, including one from Dalbar, concluded that investors who remained committed to their investment plans have typically fared better than those who have attempted to time the market.7
Source: Bloomberg, as of 8/2/24, based on the S&P 500 Index.
Source: Bloomberg, as of 8/5/24, based on the Bloomberg US Corporate Bond Index option-adjusted spread.
Source: Bloomberg, as of 8/5/24, based on the Dow Jones Industrial Average Index drawdowns and market cycles since 1945.
Source: Bloomberg, as of 7/31/24, based on the S&P 500 Index and recession dates defined by the National Bureau of Economic Research: Aug. 1957 – Apr. 1958, Apr. 1960 – Feb. 1961, Dec. 1969 – Nov. 1970, Nov. 1973 – Mar. 1975, Jan. 1980 – Jul. 1980, Jul. 1981 – Nov. 1982, Jul. 1990 – Mar. 1991, Mar. 2001 – Nov. 2001, Dec. 2007 – Jun. 2009 and Feb. 2020 – Apr. 2020.
Sources: Bloomberg and Invesco, as of 8/5/24.
Source: Bloomberg, as of 7/31/24, based on S&P 500 Index returns since 1995. The analysis determines whether investors were better served by adding or withdrawing money following the 50 worst days in the market since 1995.
Sources: Dalbar, Bloomberg, as of 12/31/23. The study is based on a comparison of the return of the S&P 500 Index versus the average asset allocation investor return based on an analysis by DALBAR, Inc., which utilizes the net of aggregate mutual fund sales, redemptions, and exchanges each month as a measure of investor behavior.
While the setup for markets was good coming into 2025, they’ve struggled as investors assess ongoing changes to the US policy approach.
The market is gauging the economic inefficiencies that may result from the Trump administration’s new tariffs and the retaliatory measures from other countries.
A government shutdown can create short-term market volatility, but they tend to resolve quickly with little market impact for long-term investors.
Important information
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Image: Hiroshi Watanabe / Getty
All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
An investment cannot be made directly in an index.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
The S&P 500 Index is a is a market-capitalization-weighted index of the 500 largest domestic US stocks.
The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes US dollar-denominated securities publicly issued by US and non-US industrial, utility, and financial issuers.
The Dow Jones Industrial Average is a price-weighted index of the 30 largest, most widely held stocks traded on the New York Stock Exchange.
Option-adjusted spread (OAS) is the yield spread that must be added to a benchmark yield curve to discount a security’s payments to match its market price, using a dynamic pricing model that accounts for embedded options.
The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.
Fed funds futures are financial contracts that represent the market’s opinion of where the federal funds rate will be at a specified point in the future. The federal funds rate is the rate at which banks lend balances to each other overnight.
The opinions referenced above are those of the author as of April 21, 2025. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
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