February 14, 2018 | by James Behr Jr
The recent drawdown in the equity markets may be more “normal” than the 2017 equity markets. This sell-off has been scary for investors and has many people pausing to ask questions about their portfolios and the stock market in general.
Although sell-offs or market corrections, defined as a 10% drop in the market, can be scary, they are generally “normal” in that they occur typically once each calendar year according to Deutsche Bank. Take a look at the chart from JP Morgan showing the intra-year declines in the stock market, as measured by the S&P 500, each year since 1980. The red number is the percent that market fell at its lowest point during the year, and the grey bar shows the finishing percentage gain/loss fore the year.
Since 1980, the stock market has experienced an average intra-year drawdown of 13.8% and a median drawdown of 10.5%. Obviously, as seen in the chart, some years are more drastic than others with 1987, 2002, and 2008 being the outliers. The more important points to note are the years where the S&P 500 did not suffer a drawdown of at least 5-6%. The only two years to not have a drawdown of greater than 5% were 1995 and 2017. This can help to explain just how “abnormal” the market was during 2017. Intra-year drawdowns are normal in the stock market and aren’t always a foreshadowing of what is to come during the year. Looking at the chart, you can see that 29 of the past 38 years have yielded positive returns even with an intra-year decline.
In addition, the S&P 500 was positive for 15 consecutive months from November 1, 2016 through January 31, 2018 gaining 30.43% during that time period. This also was an “abnormal” trend. Looking back to 1980, the S&P 500 had never been positive more than 9 months consecutively and even this streak only happened once from July 1982 through March 1983. In order to find a period in the S&P 500 similar to this, we have to go all the way back to 1958-59!
The S&P 500 hit an all-time high on January 26, 2018 at 2,872.87 and fell 11.84%, a correction by definition, to an intra-day low of 2,532.69 on February 9, 2018. We are aware that the decrease in the stock market last week can be frightening for investors, especially when the market falls as quickly as it did last week. These market corrections help stress the importance of having some downside protection in portfolios through equity-linked notes and covered-call writing. Increased volatility, while not fun, may also lead to opportunities in the closed-end fund space which will prove beneficial over the long term.
If you have any questions about your portfolio or want to learn more about this increased volatility may be beneficial long term please give us a call at (610) 825-3540 or email us at firstname.lastname@example.org.
Thanks to our intern, Alex LaRosa, for his help with this article.