Accept short-term volatility in exchange for long-term opportunities

New market commentary from Franklin Templeton subsidiary, Brandywine Global, has suggested opportunities may lie ahead for investors willing to accept the consequences of short-term volatility in exchange for long-term ‘price appreciation’.

The long-term specialist manager, with expertise across fixed income, equity and alternatives, said that the recent S&P 500 index correction by more than 10 per cent has both ignited curiosities and fears in investors as to whether an “attractive buying opportunity” has arrived or there are “deeper underlying risks” to consider.

According to Chris Galipeau, Senior Market Strategist at the Franklin Templeton Institute, now is the time to turn to history to inform its “technical and sentiment indicators” and “better understand investors behaviour”.

“Our focus is on asset prices. We begin with an historic perspective. Since 1950, the S&P 500 Index has experienced 38 corrections, defined as declines of 10% or more. Of these, 26 occurred during periods of positive economic growth, while 12 took place during recessions.

“For each of these corrections, we then calculate the S&P 500’s returns over the subsequent 12 months and classified those outcomes based on whether they occurred during a recession or not. We then constructed average return trajectories to illustrate the typical S&P 500 performance following a 10% (or greater) correction.

“On average, the market rose 13%, on average, from its trough following non-recessionary market corrections.

“Our findings also reveal a key tactical consideration. On average, the market has bottomed within a few days of a 10% drawdown, irrespective of whether recession followed or not. And while market recoveries during recessions have tended to be weaker, during non-recessionary corrections the market typically has rebounded and set fresh highs over the ensuing 12 months.

“Notably, the ongoing correction has been rapid. The S&P 500 has shed 10% of its value in just 16 days, making it the fifth-fastest correction since 1950.”

However, Galipeau clarified that history does not necessarily indicate that the rate of the decline affects the recovery.

“Beyond history, there are other reasons to believe the market may soon regain its footing. The recent market selloff compressed valuation multiples. For example, the forward price-to-earnings (P/E) ratio of the S&P 500 has slipped from 22.5 to 18 during this correction.

“Similarly, forward P/Es for technology and small-cap indexes have declined to one-year lows. Falling multiples indicate that stock prices are falling faster than earnings expectations. For long-term value-oriented investors, lower valuations present an opportunity to buy fundamentally resilient companies at a discount.

“Moreover, investor sentiment has turned sharply negative, as reflected in recent AAII surveys, where the percentage of bears has climbed to 60%, a level reached only a few times in history, and typically around major market bottoms.

“Interestingly, extreme pessimism is typically only seen in corrections of 20% or greater but is already present after today’s 10% decline. Sentiment is already at extreme levels.

“History suggests that fear often creates opportunities for long-term investors willing to accept near-term volatility in exchange for future price appreciation. With valuations now more attractive and sentiment deeply negative, this may be one of those moments.

“Other measures of sentiment concur. Our proprietary Fear & Greed Index signals that investors are deeply concerned, which is typically a good contrarian indicator. Similar readings in the past have marked attractive entry points to add equity exposure.”

Galipeau also said investor concerns have been driven by President Trump’s economic policies and recent suggestions that he was willing to “accept short-term economic ‘pain’ – even a recession – to achieve long-term policy goals”. He also reiterated the Institute’s forecast that the US economy is not likely to enter a recession at this stage.

“However, we believe it is far from clear how a recession would help resolve trade imbalances, nor do we see a recession as a likely near-term outcome,” he said.

“In fact, a snapshot of February’s incoming data paints a very different picture from the increasingly negative sentiment. Remaining data-driven, we note that the most recent employment data confirm that the job market remains on solid footing.

“Moreover, as the latest Consumer Price Index report showed, consumer prices rose at a slower pace than expected in February, keeping the door open for further rate cuts. Currently, markets are pricing in three cuts in 2025.

“Recoveries have tended to be faster and more substantial following non-recessionary corrections, while corrections that occur during recessions have typically more prolonged. Therefore, we believe it is important to emphasise that the Institute does not expect the US economy to enter a recession.

“Notably, despite the recent market selloff, the distribution of market returns continues to broaden, underscoring our key equity investment thesis of 2025. The equal-weighted S&P 500 Index has outperformed both the market capitalization-weighted S&P 500 Index and the Nasdaq this year by 2.36% and 4.45%, respectively.

“Despite noisy headlines and elevated geopolitical uncertainty, value has outperformed growth and there has been a significant rotation across different segments of the market. Going forward, we expect a broadening trend to continue in the United States, as well as globally (e.g., European outperformance).

“In sum, corrections offer opportunity. Moreover, if we assume the US and world economies avoid a recession, the recent market correction and bout of volatility present an ideal opportunity for long-term investors to increase equity exposure to our broadening market theme.”