Despite equity markets hovering near all-time highs, many Wall Street firms are warning clients to prepare for a stock market shock—or at least a major pullback as we ride through the “Dog Days” of summer. For starters, the S&P 500 had a cyclically adjusted PE (CAPE) ratio of 37.8 at the end of July, well above the historical average of 21.2. A CAPE reading above 37 has only occurred about 5% of the time since 1957. When it does, the index on average has declined 3% to 14% over the next three years. I’ll let you decide if this means the market is overpriced.
Add aggressive tariffs, multiple wars, and aspending bill that will likely increase the government debt. When you combine these concerns with disappointing data about job growth and consumer spending and a Fed that’s reluctant to lower interest rates due to an uptick in inflation, you have the ingredients for major market chaos.
Meanwhile, late summer is historically the worst time of year for stocks. Over the past three decades, the S&P 500 has performed the worst in August and September, losing 0.7% on average in each month, compared with a 1.1% gain across the other 10 months, according to data compiled by Bloomberg.
Finally, the Buffett Indicator (ratio of the total market cap of all U.S. stocks to U.S. GDP) recently topped 208% — the highest level ever recorded since being introduced in the late 1990s. According to Buffett, any time this indicator approaches 200% investors are “playing with fire.” I think he means it. According to a Wall Street Journal report, his company Berkshire Hathaway has parked over $344 billion in Treasury bills, meaning it now holds more T-Bills than the Federal Reserve’s own holdings. According to CNBC, Berkshire unloaded $4.5 billion of stock in the first six months of 2025 alone.
With many of your clients on vacation or perhaps not following the indicators as closely as you do. They may only hear snippets of pessimism when they tune in, such as this recent posting on X by Mark Zandi, chief economist at Moody’s Analytics. “The economy is on the precipice of recession. That’s the clear takeaway from last week’s economic data dump.”
How Advisors Can Help
At times like these, you can remind clients: “If you are in the market, stay in the market. But if you are in cash, let’s be conservative and wait until there are more positive signs than we are seeing right now.” It’s like Buffett’s famous quote: “Be fearful when others are greedy.” He’s clearly prioritizing liquidity and flexibility over chasing returns in this unsettled market.
As an advisor, sometimes the best strategy is just to stay the course. Now is a good time to review each client’s risk tolerance, especially if they are moving closer to retirement. Now is also a good time to review rebalancing, loss harvesting and dollar cost averaging strategies with clients, which I’ll discuss in a minute. But most of all, unsettled times are when you want to flex your listening and empathy skills more than your technical acumen.
Three-fourths (74.7%) of respondents to a 2024 Million Dollar Round Table (MDRT) survey valued emotional intelligence in their advisors. Nearly half said that an advisor who listens to and acknowledges their needs (before making recommendations) is likely to increase their trust and garner more referrals. Meanwhile, a Vanguard study of more than 5,000 investors found that having “emotional trust” with their advisor (actively listening; asking good questions; treating clients like people, not like portfolios, etc.) was the single biggest factor driving successful outcomes. Emotional skills racked up more votes than technical skills and ethical behavior combined.
It also pays to stay in touch regularly, even when the news is bad. My firm sends out newsletters to clients twice per week, updating them on economic and market news. That seemed like a lot to me when we first started, but clients have told us they really appreciate the consistency. Here are some communication suggestions that have helped me and my team over the years:
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Engage in active listening, which often includes validating their concerns and fears. Acknowledge the anxiety that uncertainty produces when market downturns are approaching.
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Don’t wait for clients to reach out. Use proactive communication to get ahead of potential crises. This will build trust and demonstrate your commitment to clients’ well-being.
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Tailor communications to fit each client’s specific situation. Address their risk tolerance and talk about how markets perform historically. Ask them if there is any reason to think now is going to be different?
On the tactical side, here are some ways to help clients during stressful, uncertain times:
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Rebalance and diversify. Remind clients of your active services to keep them on track for the plan you both agreed to. Clients sometimes forget your value when they don’t have reminders along the way. It never hurts to remind them of your steady hand on the tiller of their financial well-being.
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Consider alternative assets. Be open to alternative ways to increase yield in their fixed portfolio. Learn about private capital and first trust deeds. Both can help clients enhance the yield on their fixed allocation without substantially increasing risk.
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Loss harvesting. Computer programs are now available to take advantage of the volatility. Look into how this can enhance your client’s performance and reduce their taxes.
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Charitable giving. Many advisors are not strategic in their advanced planning conversations. For clients who are charitable, make them aware of charitable remainder trusts, IRA gifting, and other tax-advantaged giving strategies. Chances are, they’re not getting this advice from their other advisors.
Don’t Fear a Recession
Even if we slip into a recession, history shows that the R-word is not necessarily bad for stocks. As you might expect, stocks tend to decline during recessions due to reduced consumer spending, lower corporate profits, and overall economic uncertainty. However, the extent and duration of these declines can vary significantly, and after brief declines, the outlook can still be positive.
According to Russell Investments data, of the 31 recessions that have impacted the U.S. since the Civil War, stock-market returns have been positive 16 times and negative 15 times. During positive instances, the market has generated an annualized cumulative return of +9.8% with an average GDP decline of -2.7% for the economy. During the 15 negative instances, market returns were a cumulative -14.8% with an average GDP decline of -4.6%.
Case in point: during the COVID recession of 2020, the Dow Jones Industrial Average lost 37% of its value between mid-February and mid-March, and the S&P 500 lost 34% of its value. By April, despite the ongoing pandemic and economic uncertainty, the stock market began to rebound. By November 2020, the stock market had recovered to its January levels, and by the end of 2020, major indices like the Dow and S&P 500 were up significantly for the year. We saw similar trends during the Great Recession of 2007 to 2009 and the punishing recession of the early 1990s caused by the Gulf War, Savings & Loan crisis and restrictive monetary policy.
Conclusion
Help clients understand that market volatility is inevitable and that achieving one’s financial goals through investing is not a straight-line path. The greatest skill an advisor can have is helping clients stay calm and avoid reckless decisions during turbulent times. When the storm passes, grateful clients will fill your sails with an abundant wind of referrals.
#Market #Chaos #Time #Attitude #Adjustment