Investors in times of uncertainty – Sell, Buy, or Hold?

Uncertainty is currently the only thing investors around the world can be certain of. Donald Trump has served up an emotional rollercoaster for the markets—first triggering massive declines bordering on a market crash, and then delivering one of the best sessions in Wall Street’s history. In times of uncertainty, investors tend to seek liquidity, which can even lead to a sell-off in traditionally safe assets like gold. On the other hand, downturns can also present opportunities for many investors. As the well-known German banker Mayer Amschel Rothschild once said: “The time to buy is when there’s blood in the streets—even if it’s your own.”

In the current period of uncertainty, several key questions may arise, such as: Should I sell my stocks? Should I hold and wait to recover losses? Is the downturn over? Or is this a buying opportunity?

Is it worth selling your stocks?

Any decision to buy or sell stocks ultimately depends on the investor. Entering the market should come with a clear answer to questions like: Why am I buying these stocks? Why am I investing in these specific assets? And what is my exit strategy? If your predetermined conditions for exiting the market haven’t been met, then the answer to whether you should sell your stocks may already be clear.

Of course, recent extreme events have significantly changed the outlook for many assets. If the prospects for your companies or investments have shifted due to the new global trade paradigm, then it might be worth reconsidering your portfolio allocation. On the other hand, it’s worth noting that very few people—perhaps only Warren Buffett—choose to sell stocks during times of uncertainty. Therefore, it may not be the optimal time to liquidate your entire portfolio.

At one point, the S&P 500 experienced a decline of more than 20%, but on the same day, we also saw a noticeable rebound. It’s important to remember that a drop of over 20% from a peak is typically considered a bear market. Technically speaking, that threshold was not conclusively met. Looking back at history, we’ve often seen pullbacks in the 20–25% range, though more severe drops have occurred. The largest decline in the S&P 500’s history exceeded 55% and was linked to the 2007–2008 financial crisis.

As such, the current move may be interpreted either as a correction followed by a rebound—or the beginning of a more prolonged bear market.

The decline in the S&P 500 from its all-time high was less than 20%. On the other hand, a drop of more than 20% was observed in the Nasdaq 100 index, which tracks technology companies. Source: Bloomberg Finance LP, XTB

But does analyzing whether the current correction is over or not really matter? Of course, the ideal strategy would be to sell at the peak and buy at the bottom—but in reality, no one can accurately predict when those moments occur in the market cycle.

What if we take a long-term investment horizon into account? Looking at the past 35 years of the S&P 500, the longest recovery period after a market downturn lasted 14 years, although in most cases, significant corrections were recovered within 5 to 10 years.

Ultimately, over the past few decades, the average annual return on the S&P 500 has ranged between 6% and 10%. That’s significantly more than what could have been earned from bonds or by keeping money in savings accounts.

Annualized returns of S&P 500 for different investment horizons. Source: Bloomberg Finance LP, XTB

Of course, calculating the potential profit from a historical investment based on average annual returns can seem complicated, which is why it's helpful to look at the cumulative return instead.

For example, if you had invested in the S&P 500 at the beginning of 2015, the first year wouldn’t have been very impressive—but by now, you’d be looking at a 162% increase. That means an initial investment of $1,000 in an S&P 500 ETF would have grown to $2,620.

Naturally, these calculations do not take into account any potential taxes—and most importantly, they exclude dividends, which would have further increased the overall return.

Cumulative Returns of S&P 500 for different investments horizons. Source: Bloomberg Finance LP, XTB

How long do market corrections last?

Analyzing all major bear markets in the S&P 500 over the past 75 years, we can see that once a local bottom was reached, the average return on the S&P 500 one year after that low was around 40%. More importantly, the minimum return observed in those scenarios was just over 21%, while the maximum reached as high as 75%. Both of these cases come from recent history.

Equally noteworthy is the fact that recovering from a 20% drop typically took about 70–75 days on average in most of the analyzed cases. The current correction lasted from February 19 to April 8—just 48 days. Historically speaking, this ranks among the shorter corrections, although the market rebounded even faster during the pandemic.

Of course, back then, governments and central banks stepped in to support the economy. This time, investors are left at the mercy of uncertainty surrounding trade negotiations between the U.S. and the rest of the world.

Recoveries After Bear Markets Typically Lasted Around 70–75 Days, Based on Data Since 1950. Source: Bloomberg Finance LP, XTB

Is this the bottom?

Determining whether we’ve already hit the bottom is a key question for investors. Uncertainty still dominates the market, and Trump’s decisions have the potential to completely shift the landscape. It’s important to note that the recent decision to suspend tariffs doesn’t mean Trump has abandoned them altogether. Moreover, while certain tariff exemptions were made for electronics (especially from China), the initial market optimism was later tempered by the realization that tariffs weren’t fully removed—only mutually reduced to a 20% rate.

Still, some fundamental and technical indicators can help in identifying a potential bottom. One such tool is the VIX, also known as the "fear index." The VIX recently reached a level of 65, which is relatively high given that its typical range is between 10 and 30 points. For comparison, during the 2008 financial crisis, the VIX spiked to nearly 90 points, and during the pandemic it reached around 85—both significantly higher than the most recent peak.

Looking at the standardized VIX, the latest sell-off pushed the index into levels that historically suggest overselling. From this perspective, the VIX could be indicating that the bottom may already be behind us.

The VIX Index may indicate that the worst is behind us. Source: Bloomberg Finance LP, XTB

Another important indicator is the percentage of stocks trading above their 200-day moving average. When stock prices fall, they tend to drop below this long-term trend line fairly quickly. A standardized indicator based on the proportion of companies above the 200-day moving average recently gave a clear signal: significantly more stocks are declining than rising.

This too can be seen as a contrarian indicator, suggesting that the market may be oversold and potentially nearing a bottom.

The number of stocks below the 200-day moving average has risen sharply, indicating an oversold market. Source: Bloomberg Finance LP, XTB

The put-to-call options ratio is another indicator that reflects how heavily Wall Street investors are hedging against potential declines. The number of put options surged so dramatically that it clearly signaled an excessively bearish sentiment among investors.

While we're now seeing a return to more normal levels, investors are still holding a relatively high number of put options—indicating that cautious sentiment persists despite recent market stabilization.

Put-to-Call ratio for the S&P 500. Source: Bloomberg Finance LP, XTB

It's also important to look at retail investor sentiment. A survey conducted by the American Association of Individual Investors (AAII) compares the proportion of bullish versus bearish investors. At one point, sentiment became so negative that it signaled a potential state of extreme pessimism—another classic sign of an oversold market.

However, it's worth noting that this indicator hasn’t always provided reliable long-term signals. A good example is the period following the 2008 financial crisis, when sentiment remained negative for an extended time, despite the market eventually beginning a strong recovery.

The proportion of bullish vs bearish investors according to the AAII survey. Source: Bloomberg Finance LP, XTB

Are stocks cheap?

Price declines in the stock market often present buying opportunities. However, it's important to remember that just recently, both the S&P 500 and Nasdaq 100 were at historic highs, and many analysts pointed to excessive overbought conditions. Therefore, one might ask the question: Are stocks already cheap?

The S&P 500 not only experienced significant losses since the beginning of this year but at one point, it was also showing a loss over a one-year period—something that is extremely rare in the case of the U.S. stock market. While in the past, larger one-year declines have occurred during corrections on the S&P 500, it seems that the market has already reached oversold levels.

Standardized annual changes in the S&P 500. Annual losses on this index are extremely rare. Source: Bloomberg Finance LP, XTB

It’s not only the price changes that matter, but also the price-to-earnings (P/E) ratio. Recently, the P/E ratio has dropped from around 28 points to 23 points. Historically, this brings it closer to the average, as shown in the chart below. Meanwhile, the price-to-forecasted-earnings ratio has fallen from 26 to 20. The range between 25 and 30 in the past has often signaled overbought conditions, so one could say that, relative to earnings, stocks are no longer expensive, but they’re certainly not very cheap either.

Standardized P/E ratio for the S&P 500 shows that stocks are no longer expensive, though they're also not extremely cheap at the moment. Source: Bloomberg Finance LP, XTB

Summary

In conclusion, although stock valuations have returned to neutral levels and signs of overselling are appearing, uncertainty still dominates the market. Fundamental and technical indicators suggest that stocks are no longer expensive, but it’s also difficult to say that we’ve reached the final bottom. Historically, after bear markets, recovering losses took around 75 days, which means that Wall Street may still have a long road ahead. Decisions to buy or sell should be made carefully, taking into account personal strategy and risk tolerance, as market conditions can change dynamically, especially in such unpredictable times as we are currently experiencing.