Dear Clients,
I want to take a moment to address what has clearly been a difficult and unsettling period in the markets. When volatility rises and headlines become more extreme, it is natural for concern to follow. Periods like this tend to feel unique in the moment—but from a market history perspective, they rarely are.
Goldman Sachs recently noted that, despite current concerns, the risk to markets may actually be skewed to the upside if geopolitical tensions begin to ease. While no one can predict timing with precision, markets often move ahead of improving conditions—not after they become obvious.
After more than three decades in this business, I would not claim any special ability to forecast the future. However, experience does develop what I would call a “mechanics ear”—a sense for when markets are stretched. Over the past several months, it was relatively easy to identify pockets of excess and speculation. Today, the tone feels markedly different. Sentiment has shifted from optimism toward fear.
When markets decline in a persistent, almost relentless fashion, they often overshoot to the downside—just as they can overshoot to the upside during strong advances. That does not mean the decline must end immediately, but it does suggest that conditions are becoming increasingly stretched.
Right now, investors are grappling with a wide range of potential negative outcomes:
- Could geopolitical tensions escalate and become prolonged conflicts?
- Could oil prices spike dramatically?
- Could the Federal Reserve be forced to tighten policy into a weakening labor market?
- Could technological disruption create widespread economic dislocation?
- Could political instability rise domestically?
- Is there any safe haven beyond traditional assets?
Do these risks sound familiar? They are the kind of fears that investors have contended with for generations. What makes this time different? We think very little.
It is important to recognize that these concerns are often evaluated in isolation, as if each risk will fully materialize. In reality, the global economy is dynamic, and policymakers have multiple tools at their disposal. Conflicts can de-escalate quickly, central banks can adjust policy, and economic conditions can stabilize faster than expected.
Equally important, the current environment does not resemble past systemic crises such as the 2008 financial crisis, the bursting of the technology bubble, or the oil shocks of the 1970s. While uncertainty is elevated, the underlying economic structure remains more resilient than those periods.
At the same time, there is a powerful structural force underway that deserves attention: artificial intelligence. Recently, major corporate leaders—including the CEOs of Coca-Cola and Walmart—have openly stated that the rise of AI influenced their decision to step aside. Their reasoning was straightforward: the next phase of growth will require new leadership, new energy, and a deep understanding of how AI will transform their businesses.
That is a notable development. These are not speculative companies—they are among the largest and most established organizations in the world. When leaders at that level step aside specifically to position their companies for an AI-driven future, it reinforces just how significant this transition is.
In many ways, this shift may prove to be even more impactful than the internet revolution of the 1990s. The scale of investment we are seeing today reflects that. While there has been increasing discussion about a potential “AI bubble,” these types of leadership decisions suggest the opposite—that corporate America is treating AI as a long-term, foundational transformation rather than a short-term trend.
This helps to legitimize the substantial capital being deployed into AI infrastructure, software, and applications. Over time, we believe the stock market will be a primary beneficiary of this wave of innovation, much like it was during prior technological revolutions.
Market history provides helpful context:
- The Nasdaq has recently experienced one of its longest weekly losing streaks on record. Historically, declines of this magnitude have not extended indefinitely and have often been followed by recovery periods.
- The second year of the presidential election cycle (the current phase) has historically been the weakest, with significantly stronger returns typically occurring in years three and four.
- Elevated options activity—particularly spikes in put volume (negative sentiment)—has historically coincided with periods of heightened fear and has often preceded market rebounds, though this is not a guarantee.
- Midterm election years frequently include meaningful drawdowns, but they have also historically produced strong forward returns over the subsequent 12 months.
- Goldman Sachs currently projects S&P 500 earnings growth supporting a longer-term index level of approximately 7,600 by year-end 2026, reflecting a constructive outlook beyond current volatility.
These historical patterns are illustrated in the accompanying charts:
S&P 500 Midterm Election Year Declines & Recoveries (Source: First Trust)
This chart shows that in midterm election years, the market often experiences a noticeable pullback during the year—but importantly, it has historically gone on to produce strong returns over the following 12 months. In simple terms, weakness during these periods has often been followed by recovery.
S&P 500 Earnings and Price Forecast (Source: Goldman Sachs Global Investment Research)
This chart compares where the market is today with where earnings are expected to go in the future. The takeaway is that if corporate earnings continue to grow as expected, there is a reasonable path for the market to move higher over time.
SPY Put Volume and Subsequent Market Performance (Source: Subu Trade)
This chart highlights periods when investors are heavily buying downside protection (puts), which typically reflects fear. Historically, when fear reaches these elevated levels, markets have often stabilized and moved higher afterward.
S&P 500 Returns by Presidential Cycle Year (Source: Bespoke Investment Group)
This chart shows that the second year of a presidential cycle has historically been the weakest for markets, while years three and four tend to be much stronger. In other words, the current phase has often been a softer period within a longer-term positive cycle.
Nasdaq Performance Following Extended Weekly Declines (Source: Bespoke Investment Group)
This chart shows that extended losing streaks in the Nasdaq are rare and have not tended to continue indefinitely. Historically, once markets reach these kinds of extremes, they have typically reversed and recovered.
While past performance is not predictive of future results, these patterns reinforce an important principle: periods of elevated fear have historically created opportunity for disciplined investors.
There are times when markets rise further than fundamentals justify, and there are times when declines extend beyond what is warranted. We believe the current environment is closer to the latter. That does not preclude additional volatility, but it does suggest that long-term investors should be cautious about making reactive decisions.
It is during periods like this that investors are most at risk of making decisions that can take years to recover from. Remaining patient, maintaining discipline, and staying aligned with a long-term strategy have consistently proven to be the most effective approach through market cycles.
As always, we are closely monitoring conditions and positioning portfolios with both risk management and long-term opportunity in mind. If you have any questions or would like to discuss your portfolio in more detail, please do not hesitate to reach out.
Past performance does not predict future results.
Sources: First Trust, Goldman Sachs Global Investment Research, Bespoke Investment Group, Subu Trade
Sincerely,
Kessler Investment Group, LLC
All information in this presentation is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic performance data is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. Certain statements contained within are forward looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Please consult your adviser for further information.
Opinions shared in this presentation are not intended to provide specific advice and should not be construed as recommendations for any individual. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.