Stocks rebounded on December 19, 2024 after a sharp selloff, but it’s an opportune moment to confront an uncomfortable reality: The market may be overdue for a more significant pullback. For wealth advisors, this represents both a challenge and an opportunity to help clients navigate volatility effectively.
Market Context: A Pending Correction?
The S&P 500, despite its nearly 3% drop on Wednesday following the Federal Reserve’s updated projections on inflation and delayed interest rate cuts into 2025, is down only 3.6% from its recent all-time high. Even with Thursday’s recovery, the index remains far from the 10% decline that defines a market correction. The S&P 500 hasn’t experienced such a pullback since October 2023, making this one of the longest stretches without a correction in recent years.
Before Wednesday’s setback, the S&P 500 had gained 4.6% since Election Day, pushing valuations to elevated levels. With the index trading at 21.5 times forward earnings estimates—well above its five-year average and nearing its January 2021 peak of 23—some analysts see froth building in the market. While corrections are often viewed with trepidation, they can serve as a healthy reset, allowing the market to stabilize and provide buying opportunities.
What a Correction Means for Advisors
Corrections are an essential part of bull markets, shaking out speculative excess and creating opportunities for disciplined investors. John Bartleman, CEO of TradeStation, notes, “A correction is likely, but there are still a couple of years left in this bull market.” His perspective underscores the importance of maintaining a long-term view even during periods of heightened volatility.
Nancy Curtin, CIO at AlTi Tiedemann Global, echoes this sentiment, saying, “We’re overdue for a correction, and that wouldn’t be the worst thing for investors.” She emphasizes that such pullbacks often present attractive entry points for those prepared to act strategically. For advisors, this is an opportunity to reassure clients, highlight the value of staying the course, and position portfolios to take advantage of potential dips.
Corrections Are Not Bear Markets
It’s crucial to distinguish between corrections and bear markets. While a correction involves a 10% decline from recent highs, a bear market requires a more severe 20% drop and is often accompanied by a substantial economic shock. The Federal Reserve’s marginally hawkish stance isn’t likely to trigger such an event on its own. As Bret Kenwell, U.S. investment analyst at eToro, explains, “Mild inflation is good for equities, and earnings momentum continues to act as a tailwind into 2025.”
Kenwell points out that any significant correction in U.S. equities should be viewed as an opportunity rather than a cause for alarm. Analysts forecast a nearly 15% rise in S&P 500 earnings in 2025, with an additional 13% increase expected in 2026. These robust profit growth projections reinforce the resilience of the current bull market and provide a foundation for future gains.
Maintaining Perspective Amid Volatility
While recent market movements may cause concern, it’s essential to maintain perspective. The U.S. economy remains a global leader, supported by strong corporate earnings and solid fundamentals. Lule Demmissie, an analyst with Apex Fintech Solutions, characterizes the recent pullback as “healthy,” adding, “If the U.S. wasn’t so strong, that would be a problem.”
Demmissie also highlights the enduring appeal of leading technology stocks, particularly among younger investors. The “Magnificent Seven” tech giants, along with Broadcom, which recently surpassed a $1 trillion market capitalization, continue to attract interest despite market fluctuations. “We’re not seeing skittishness,” she notes, pointing to the resilience of investor sentiment in these high-growth areas.
Learning from Recent Volatility
This isn’t the first time the market has faced turbulence tied to Federal Reserve policy. In late July and early August, stocks dropped amid fears that the Fed was delaying rate cuts. A mix of weaker economic data and international market turmoil, particularly in Japan, exacerbated concerns. The S&P 500 came close to a correction, falling 9.5% from its peak, while the Nasdaq Composite slid more than 10%. Yet these jitters proved short-lived. The Fed’s September rate cut reignited a rally that lasted until the December selloff.
Advisors can draw important lessons from these episodes. While market volatility can be unnerving, history demonstrates that recoveries often follow downturns, provided economic fundamentals remain intact. Helping clients understand this cyclical nature of markets is a critical part of managing their expectations and reinforcing the value of a disciplined investment approach.
Positioning Portfolios for Resilience
For wealth advisors, periods of market uncertainty present an opportunity to reassess client portfolios and ensure they are well-positioned for both short-term challenges and long-term growth. Key strategies include:
Diversification: Revisit portfolio allocations to ensure clients aren’t overly exposed to high-flying sectors or individual stocks. A balanced mix of asset classes can help mitigate risk.
Rebalancing: Use market pullbacks as an opportunity to rebalance portfolios, potentially shifting gains from outperforming assets into undervalued areas.
Cash Reserves: Encourage clients to maintain liquidity for strategic deployment during corrections. Having capital ready to invest when valuations become more attractive can significantly enhance long-term returns.
Reinforcing Goals: Remind clients of their long-term objectives and the importance of staying invested. Short-term market movements shouldn’t derail a well-thought-out financial plan.
Looking Ahead: Opportunities Amid Challenges
While corrections can feel unsettling, they often pave the way for renewed growth. The path forward may include bumps, but the broader trajectory of the market remains upward, supported by strong earnings growth and a resilient economy. For RIAs, this is a time to provide clarity, confidence, and actionable strategies for clients.
The lesson is clear: The path higher isn’t always linear, but disciplined investing and thoughtful planning can help clients navigate volatility and achieve their financial goals. As markets evolve, staying proactive and client-focused will ensure advisors remain trusted partners in building lasting wealth.
