Over the past 120 years, the stock market has historically trended upwards, except 1929-1939, during the Great Depression. But throughout a given year, significant drawdowns are standard.
Over the past 120 years, the stock market has historically trended upwards, except 1929-1939, during the Great Depression. But throughout a given year, significant drawdowns are standard. The S&P 500 is now up more than 20%, with the worst peak-to-trough drawdown in 2021 of a little over 4%. The average intra-year max drawdown in the United States market is closer to 14%, with last year seeing the S&P down 34% in a matter of weeks because of COVID-19. Since then, the market has recovered magnanimously, almost doubling in value since mid-March 2020, when the pandemic first hit.
With such a dramatic recovery in a short period, this can be scary for investors, with many wondering if an impending market downturn is on the horizon.
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. Since 1980, double-digit declines have been frequent, with at least one occurring within any given calendar year. Actually, in 21 of the last 41 years, the S&P saw a double-digit pullback within the year. That’s more than half the time! But in 14 of the 23 years, the market finished the year in positive territory.
Since 1980, the stock market has experienced an average intra-year drawdown of 13.8% and a median drawdown of 10.5%. Some years are more drastic than others, like 1987, 2002, 2008, and 2020. The more important point to note is 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 those times. Intra-year drawdowns are normal in the stock market and aren’t always a foreshadowing of what is to come during the year.
Market volatility is essentially non-existent this year. The S&P has now seen 50 new all-time highs through August 23, 2021, with only three days where it was down by 2% or worse, compared to last year, seeing 25 down days of 2% or worse.
The S&P 500 was positive for 15 consecutive months back in November 2016 through January 31, 2018, gaining 30.43% during that time, also an “abnormal” trend. Looking back to 1980, the S&P 500 had never been positive for more than nine months consecutively, and even this streak only happened once from July 1982 through March 1983. To find a period in the S&P 500 similar to this, we have to go back in time to 1958-59!
The S&P 500 hit an all-time high on April 1, 2021, at 4,019.87 due to vaccine rollouts and the hope for a better grip on the pandemic. But that was before the 51% decline, from 3,386.20 on February 19, 2020, to 2,237.40 on March 23, 2020, sending equity markets into a tailspin.
Decreases in the stock market, such as what occurred in February and March 2020, can be frightening for investors, but turnarounds are always inevitable. In 2021, risk factors such as inflation, real estate, and COVID-19 are worth observing, as they could lead to a market correction. 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.
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