Panic reactions in the markets: what history tells us and how investors should act
By Oscar Tejada Biurrun
Financial markets tend to react with particular intensity to unexpected events. This behavior is reflected both in episodes of negative volatility and in abrupt upward movements, and is often observed during earnings reporting season.
A recent example can be found in the case of Intel, which last week presented its results for the first quarter of 2026. Both the reported figures and the forecasts exceeded market expectations, triggering a share price increase of nearly 24% in just two sessions. These types of extreme reactions illustrate how surprise and the emotional component continue to play a relevant role in market behavior.
This pattern is not exclusive to corporate earnings. The market tends to react similarly to any news that increases uncertainty: unexpected changes in central bank monetary policy, election results, spikes in geopolitical tensions or, as we have repeatedly experienced in recent years, the outbreak of armed conflicts.
Intuitively, many investors respond by reducing their level of risk, selling assets and waiting for the environment to stabilize before reinvesting. However, empirical evidence shows that this strategy is often counterproductive. Numerous studies conclude that avoiding impulsive decisions is generally more efficient, as markets tend to self-regulate over time. To illustrate this, it is particularly useful to analyze the historical behavior of the S&P 500, the benchmark index for global equities, with clearly illustrative data.
First, it is worth remembering that markets spend most of their time in an upward trend. In the case of the S&P 500, more than 73% of trading sessions have historically taken place in bull markets.
Second, over the last 75 years there have been 12 bull markets and 12 bear markets, with very marked differences in both duration and returns. Bull markets have lasted on average more than five years and have generated an average return of 254%. In contrast, bear markets have lasted, on average, approximately one year and have caused average portfolio declines of 31%. The asymmetry is clear: periods of growth are longer and significantly more profitable than episodes of correction.
A third key aspect is that, after sharp corrections and once the market stabilizes, the initial phases of the new upward leg concentrate the largest daily gains. Therefore, selling in moments of panic implies a high risk of missing out on a substantial part of the recovery. When the investor regains confidence and decides to reinvest, a relevant portion of the upward movement has already taken place.
Finally, it is important to remember that the S&P 500 experiences significant corrections virtually every year. Since 1928, the average decline from an annual high to an annual low has been approximately 16%. In other words, corrections are a natural part of market behavior. And, despite this recurring volatility, the S&P 500 has generated an average annual return of over 10%.
One study identified 40 corrective movements in the S&P 500 between 1990 and the end of 2024. Particularly illustrative conclusions can be drawn from this analysis:
• The average time from the previous peak to full recovery was 142 days.
• Decline phases lasted, on average, 55 days, while recovery required an additional 87 days.
• 75% of corrections reversed in less than two months.
• 92.5% of declines recovered previous levels in less than six months.
These data reinforce a fundamental conclusion: selling hastily usually has a negative impact on final returns, since when the investor returns to the market after uncertainty fades, a significant part of the rebound has already materialized.
However, not all market downturns respond to the same causes, and this difference is key to assessing their duration and depth. The most severe episodes of stock market declines this century—the dot-com bubble and the Global Financial Crisis—originated in structural weaknesses in corporate balance sheets. In the first case, these fragilities were concentrated in the telecommunications sector, and in the second, in the financial sector. In both episodes, the problems spread to the entire economic system and required long restructuring processes before growth and confidence could be restored. Not surprisingly, these two periods had exceptionally long durations, of 1,546 and 1,129 days respectively. If they were excluded from the historical analysis, the average timeframes for market decline and recovery mentioned above would be significantly reduced.
By contrast, more recent corrections have been largely driven by external factors—such as the pandemic, the war in Ukraine, U.S. tariffs, or the conflict in Iran. This exogenous origin has been key to explaining the speed of recoveries and the markets’ ability to resume upward trends. Despite the initial economic impact, exacerbated by energy crises, supply chain disruptions, inflationary pressures and rising interest rates, companies entered these episodes with particularly strong balance sheets. This financial strength has allowed them to absorb external shocks, manage them, and continue generating solid results and favorable medium- and long-term outlooks.
As we have seen, market corrections are inevitable. Sometimes they will be moderate and at other times particularly intense. Faced with this reality, a key question arises: how can investors know whether they are in a position to withstand the temporary losses caused by these declines? In many cases, the biggest mistakes do not originate in the market, but in insufficient planning.
The answer is closely linked to each investor’s level of risk tolerance. For this reason, in wealth advisory firms each client undergoes a specific test to analyze their risk profile. In this process, factors such as total wealth composition, investment time horizon, return objectives and future liquidity needs are analyzed.
Based on this profile, the manager can build a diversified portfolio aligned with each investor’s characteristics, combining different financial assets. The objective is twofold: to mitigate the impact of adverse market periods and to avoid impulsive decisions that, in the long term, could have a significant cost for the investor’s wealth.
We therefore conclude that volatility and corrections are an inherent part of how financial markets function. Historical experience shows that reacting with panic and selling at times of greatest stress is usually detrimental to long-term returns. In the world of investing, the real cost of panic is not the market’s decline, but giving up its recovery.
Maintaining a long-term perspective supported by solid fundamentals, proper planning and consistent investment discipline remains one of the best strategies for navigating different market cycles, always taking into account each investor’s profile and risk tolerance.