Last year ended with a shock as the Federal Reserve’s cautious rate-cut outlook spooked investors, causing a 3% drop in the S&P 500.

Concerns about inflation and economic weakness linger, but fundamentals for 2025 remain strong, with improving corporate credit availability and favorable tax policies poised to boost growth.

Despite market volatility, history shows that patience during pullbacks in bull markets pays off, as current valuations and sentiment remain bullish.

Investors are encouraged to view dips as opportunities rather than reasons to panic.

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Last year was set to end on a high note… Then the Federal Reserve got involved.

Just two weeks before the end of the year we had the worst Fed decision day in 23 years. Fed Chair Jerome Powell announced it would cut rates by another 0.25% but it warned that investors could expect no more than two cuts in 2025.

Investors panicked, and the S&P 500 fell 3% in one day. Heading into 2025, this naturally has folks worried about persistent inflation and a weaker economy than we were promised.

However, we’re still beating the same drum we have been for months.

Nothing has changed regarding how strong the economy should be in 2025. As we have covered over the last few months, corporate credit availability is finally improving. That means companies will be able to borrow and invest in their operations.

And with the upcoming administration’s tax plans, corporations have no excuses not to grow their earnings this year.

It’s natural to worry when stocks start falling. That said, the last thing you want to do is sell when the market is set up for success.

Back in July, we discussed how today’s market looks a lot like the early stages of the massive internet boom of the mid-to-late-1990s.

Since the launch of ChatGPT, the Nasdaq is up close to 100% and we’re still far from the best part of the market rally.

Through the market top in March 2000, the Nasdaq went on to rally nearly 600%…

And in hindsight, it’s hard to imagine why anybody wouldn’t have stuck with that market.

That is until you realize how many times the average investor would’ve panicked. You see, despite how strong that market rally was, over that five-plus year period, the Nasdaq fell 10% on 10 separate occasions.

Take a look…

Each one of these drawdowns would’ve felt like the market top at the time. Plus, people who sold out on fear would’ve struggled to find a good place to buy back in.

The point is simple. As long as the market has reason to grow like it does today, the best thing to do is remain patient when the market is volatile.

Even after the recent selloff, both valuations and investor sentiment are bullish. That means we could continue to have short-term volatility. That doesn’t mean investors should panic.

As long as all the key factors that drive the market, from limited debt headwalls to improving credit availability, growing corporate investment, and a backdrop of deregulation and potential tax reductions can fuel all those things even more.

Investors should recognize the pullbacks as just that, pullbacks in a bull market.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research