The second quarter got off to a rocky start with U.S. stocks declining in value by more than 10% in just two trading days (April 3 and 4). The selloff precipitated by President Trump’s tariff announcement was one of just four instances since World War II in which U.S. stocks declined 10% or more in two days. The others occurred in March 2020, November 2008 (during the financial crisis), and October 1987.

U.S. stocks ultimately regained their footing and managed to end the quarter with a positive return. The other asset classes in your portfolio also contributed positively, with non-U.S. stocks leading the way.

Signs of Normal

For many investors, the first half of this year has been an unsettling time. A growing list of concerns now includes trade wars, conflict in the Middle East, a ballooning fiscal deficit, and increased market volatility. These concerns are legitimate. However, based on what we have observed so far this year, I would like to advance an additional narrative. Financial markets have acted rather normally. Let me give some examples below.

Intra-Year Stock Market Declines 

The selloff in U.S. stocks this year began in the middle of February and bottomed on April 8. Over that period, the S&P 500 declined more

than 18%. Thinking back in time, you will probably recall certain years in which stocks lost value. The year 2008 might come to mind or more recently, 2022. But you may not recall market declines that occurred during years in which stocks ultimately had a positive return.

The chart on the below¹ compares the annual returns (blue bars) for the S&P 500 in each year since 1980 with the intra-year decline (orange diamonds) in those years. You can see it is common for stocks to decline in price between 10% and 20% in a given year, even in those years that ultimately result in a positive return.  

U.S. stocks produced a positive return in 34 out of 45 years since 1980. Yet the average intra-year decline during those years was about 14%.  

So far this year, U.S. stocks are in positive territory and experienced a decline that was not far off the average intra-year decline of the past 45 years. Pretty normal.

Hard to Pick Winners — The Magnificent 7

Coming into the year, I think it’s safe to say the most popular individual stock investments were the so-called Magnificent 7. This list consists of Nvidia, Microsoft, Apple, Amazon, Tesla, Meta, and Google. During the aforementioned market selloff, six of the seven underperformed the broad U.S. stock market. The average performance of the “Mag 7” stocks from February 19 through April 8 was a loss of more than 26%.  

Sustained outperformance of a select group of common stocks is not typical. Some unpredictable rotation to the winners of tomorrow is more the norm.

Hard to Pick Winners — U.S. Stocks

Turning to asset class performance, many expected U.S. stocks to continue outperforming other asset classes. Goldman Sachs’ 2025 Wealth Management Outlook, “Keep On Truckin’,” outlined its rationale for the continued “preeminence” of U.S. investment assets.

Instead, non-U.S. stocks have been the main driver of returns through June 30. Non-U.S. developed market stocks have returned almost 20%, and emerging market stocks posted a roughly 15% return. Part of this story has to do with fluctuations in currency values, as the dollar has declined this year in value relative to other currencies. You own non-U.S. stock investments that are denominated in currencies other than the dollar. When the dollar loses value in relation to these currencies, your non-U.S. stock investments have an extra tailwind to their returns.

The Case for Global Diversification

To some degree, global stock diversification has fallen out of favor in recent years. Some investors reasoned that the U.S. had better economic prospects and more dynamic, profitable companies, which would lead to continued U.S. stock outperformance. If that was true, what’s the point of diversifying globally?

This line of thinking fails to consider several key points. First, even the best companies in the world may not be superior investments if the prices to acquire them are too high. Second, global diversification has a long and successful track record of reducing portfolio risk. This year is a case in point. Lastly, any one country dominating global stock returns for prolonged periods is out of the ordinary. For U.S. stocks to take a backseat for some time while other markets around the world take the lead, well — that’s normal.

Bonds Doing Their Part 

Bonds are usually the less exciting part of an investor’s portfolio. Governments and companies issue bonds to borrow money from investors in exchange for regular interest payments and a promise to return the principal at a specified date. Because the return pattern for bonds is more predictable than that of stocks and because they exhibit less volatility, bonds are a useful risk management tool for building a portfolio.

High-quality bonds also have exhibited a tendency investors like. They typically have had positive returns when stocks lose money. Over the last roughly 100 years, U.S. stocks have experienced a negative return approximately one out of every four years. Bonds produced positive returns in all but three of those negative return years for stocks. In other words, it has not been normal for bonds and stocks to decline in value together. Yet one of those three years occurred in 2022 — the worst year on record for U.S. bonds.  

When U.S. stocks declined approximately 18% earlier in the year, bonds produced a positive total return. This outcome was a welcome reemergence of the more typical stock-bond performance relationship. In addition, bonds today have a positive expected return over and above inflation, another significant development and much more typical than the very low interest rate environment we experienced in 2020–2021.

Signs of normal are out there! They are indicators that, despite the change and uncertainty in the investment landscape, the core principles of sound investing remain the same.  

As always, we look forward to our next conversation.

Footnotes:

1. High quality refers to bonds issued by entities with a high likelihood of making good on their promise to pay interest and repay principal.  Bonds issued by the U.S. Government are an example.
   
2. Here I am using intermediate-term U.S. Treasuries as a proxy for “bonds”.
3. For instance, 10-year U.S. Treasury Inflation Protected Securities (TIPs) currently pay an investor about two percent per year over and above inflation over the next decade.