We are through the first quarter of the year and if each month felt like a year on its own, the past three months have felt more like a decade.

Software has gone from the business model of choice to one where markets are not sure if it will even exist in a year.

Artificial Intelligence

(AI) narratives on a monthly basis have seemingly bounced between a trend with insatiable demand and constrained supply, to one that may be at peak demand. Meanwhile the recent geopolitical turmoil in the

Middle East

flips from “mission accomplished” to impending escalatory measures on almost a daily basis, swinging the entire

energy market

with it. So, you may be forgiven if you feel like you or the markets might be losing their minds, but let’s highlight a few important things to keep in mind in times like these.

Market impacts from modern wars tend to be short-lived

In the short-term, while geopolitical risks such as wars can feel all-encompassing to markets, they actually tend to lead to relatively “normal” market corrections in the 10 per cent to 20 per cent range and it is typically a matter of months for markets to recover. Going as far back as 1990,

U.S. market

drawdowns in excess of 20 per cent were not related to wars. The deeper and longer bear markets were reserved for other issues such as the tech bubble, the great financial crisis and the 2020 COVID pandemic. In fairness, as far as 10 per cent to 20 per cent corrections go, oil related tensions have tended to lead to drawdowns closer to the 20 per cent range. Nonetheless they are pretty average as far as market drawdowns go. Another point to keep in mind regarding oil crises is that the oil market and North America’s dependency on foreign oil has changed since the nineties as well. In general, tumultuous times such as this have tended to be times to buy as opposed to times to sell.

U.S. markets have already reached correction territory

Broad markets are already in a

correction

and with markets already pricing in some bad news at this stage investors need to start thinking about how much of the bad news is priced in. If we look at the range of outcomes in the prior point, we are probably halfway through a worst-case scenario and more likely closer to the end than the beginning, given more recent incidences. We find that once markets hit correction territory, it is time to sharpen the pencil and start looking for opportunities. Looking for the next great investment selling at a discount often tends to be far more productive than staring at and fretting over geopolitical headlines.

Companies and the economy are on strong footing

It is always good to take it back to fundamentals and see how the actual companies are faring and what they are seeing. Having recently exited earnings season, we fortunately have a fairly recent datapoint, and things continue to look OK. Broadly, earnings results appeared to be in-line with market expectations and most management outlooks and commentary we saw pointed to constructive views. We think the management commentary is particularly important, as the actual quarterly earnings can be a bit dated but the outlooks are more of a reflection of company views today. Things aren’t all rosy, and they never are, but the economy and companies are operating more from a position of strength which is better than the alternative in times of turmoil.

Market valuations are looking reasonable

One of the oft-cited reasons why not to own stocks is typically about

valuations

being too high but valuations for the S&P 500 are quickly becoming far more digestible. The S&P 500 is now in the process of breaking below 20X forward earnings. Sure, 20X might not sound like bargain-bin pricing but it is important to keep in mind that since 2020, the 20X price-to-earnings (P/E) range has tended to be a bit of a valuation floor and this includes the recent tariff drama last year. Meanwhile, under the hood, many companies look far more attractive from a valuation perspective while their fundamentals will arguably see little impact from the current geopolitical issues at hand.

Volatility is normal, panic is optional

Volatility

is the price of admission in order to be awarded market returns, or better. These types of markets are not new. This is not the first, and it will not be the last, correction but time and again, markets and economies emerge from the crisis of the moment only to regain past highs over time. It is always uncomfortable in the moment but almost always zooming out and thinking long-term is a recipe for success. While it is true that markets can lose their minds from time to time, investors have the benefit of being able to do the opposite, think past the headlines and even take advantage of the deals on offer when everyone else is panicking.

Peter Hodson is taking a brief break and will return in two weeks. Ryan Modesto is chief executive officer and portfolio manager at i2i Capital Management and CEO at 5i Research Inc. The author and i2i Capital Management may have a financial or other interest in stocks mentioned.

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