AI Bubble Fears & Market Volatility Overview

Discussing big stock market gains and big stock market drawbacks, and how they often go hand-in-hand, in this week’s Fastest 4 Minutes in Finance.

I’ve had quite a few client conversations in the past few weeks about a possible AI bubble. The fear mongers are out, telling investors that there’s too much optimism over Artificial Intelligence, without enough results, and it doesn’t justify stock valuations. And that might be right. But, even if it is, it doesn’t mean there’s bubble that’s about to burst. It might mean that there will be a stock market correction in the near future. And that, would be perfectly normal.

S&P 500 Performance and Intra-Year Drawdowns

At the time of this recording, the S&P 500 Index is up about 14% year-to-date. That includes digging out of an 18.9% drawdown in the spring. Remember, the tariff tantrum?

LPL Research has some great perspective that shows us that’s not uncommon. In fact, the average drawdown in any given calendar year has been over 14% since 1980. During that same time period, the Index has averaged 10.7% annually.

Here’s a closer look using a chart from LPL Research.

The blue bars show the S&P 500 annual returns going back to 1980. There have been 35 positive years out of the past 45 years. 14 times, the Index pulled back 10% or more during the year. That means, in years with positive returns, 40% of the time, there was a correction during the year.

9 times, there was a 14% or greater pullback during the year. LPL Chief Equity Strategist Jeff Buchbinder says double-digit intra-year declines often come with double-digit annual gains, one of the most powerful messages in investing.

Bubble vs. Market Correction: Key Differences

There’s a difference between a bubble and a drawdown. A bubble can burst, as it did in the late 90’s into the first decade of the 21st century, commonly known as the Dot-com boom and bust. That led to several years of stagnant or even negative performance. But, the bubble burst was just a catalyst. In that decade we also experienced 9/11, two wars in Iraq and Afghanistan, and the Great Financial Crisis.

As we’ve illustrated, a drawdown is common, and usually short-lived. That’s because it’s common for investors to get over their skies a little, driving up valuations too much too quickly, and they need to course correct.

Investor Behavior and Staying Disciplined During Volatility

Keep this in mind when the next bout of volatility arrives. Keeping that perspective can help you avoid doing the wrong thing, at the wrong time, for the wrong reason.

Securities are offered through LPL Financial, Member FINRA/SIPC. GenWealth Financial Advisors is an other business name of Independent Advisor Alliance, LLC. All investment advice is offered through Independent Advisor Alliance, LLC, a registered investment adviser. Independent Advisor Alliance, LLC is a separate entity from LPL Financial.