The first quarter of 2026, as experienced through the lens of the media , was a volatile quarter full of war, inflation, job loss, and dropping stock values, especially of the biggest technology stocks. The same quarter, as experienced through the lens of historical stock returns, was relatively calm.
During the first quarter of 2026, the market’s maximum drop from a prior high was down -9.10%, and at quarter end, the market was down -4.63%.
Historically, on average the market sits down -9.49% from a prior high, and the average intra-year drop is -14.20%. The average quarterly return is 2.09%, and the standard deviation of quarterly market movements is 7.20%. This means, a quarterly movement between -5.11% and 9.29% is still within one standard deviation of normal. Even a move between -12.30% and 16.49% remains within two standard deviations.
In other words, a down quarter is not evidence that markets are broken. It is historically just evidence that markets are markets.
A dramatic response, such as adjusting your strategy to chase returns or selling to cash, almost always does more harm than good. The correct response to nearly all market movements is just rebalancing.
Rebalancing means trimming a portion of what has done well and adding to what has not. That process feels uncomfortable in the moment, but it is often exactly the right response. As we suggested in “Your Asset Allocation Should Be Priceless,” the value of a well designed asset allocation is often clearest when markets are disappointing.
While large technology declined this past quarter, other parts of the market appreciated. While Vanguard Information Technology ETF (VGT) lost -7.34%*, Vanguard Mid-Cap Value ETF (VOE) gained 4.46%* and Vanguard Small-Cap Value ETF (VBR) gained 3.17%*.
That divergence is important.
It means the quarter was not a story about “the stock market” broadly declining. It was, to the extent that a story could be told, a story about one sector finding resistance and cooling off while others did better. Investors who had expected large-cap growth technology to correct after years of dominance were not surprised. If anything, the surprise is how moderate the correction has been so far.
We have written about this before in “Factor Investing: Small and Value Factors.” Value stocks do not outperform every quarter or every year, but diversification across market segments helps a portfolio avoid being held hostage by whichever part of the market is currently making headlines.
International diversification also mattered.
Vanguard FTSE Developed Markets ETF (VEA) gained 2.76%* representing meaningful positive returns for most foreign stocks.
Some countries such as Denmark (EDEN) were down -8.54%* for the quarter. While other countries were up for the quarter, such as Taiwan (FLTW) up 11.95%*, South Korea (FLKR) up 24.40%*, and Norway (NORW) up 27.20%*.
Country specific returns are a useful reminder that international diversification is not one monolithic bet. Different countries, sectors, and valuations can produce very different results during a quarter. And the rebalancing bonus between different countries is as important as the diversification itself.
A well-designed portfolio should expect disappointing quarters. It should also be designed such that not every investment will move in sync with one another. That is the point of diversification. Something in the portfolio should always be disappointing, and something else should usually be holding up better.
It is always a good time to have a balanced portfolio.
*All the quarterly returns of ETFs listed in this article are calculated by taking the 3/31/2026 Adjusted Closing Price of actual investments on Yahoo! Finance and dividing by the Adjusted Closing Price on 12/31/2025. This adjusts for dividend payments but does not reinvest them.
Photo by Mattia Poli on Unsplash. Image has been cropped.
