Written by Sam Ro, posted at Yahoo Finance, click here to go to it.
It’s been an incredibly unpleasant year for stock market investors.
After setting a record closing high of 4,796 on January 3, the S&P 500 tumbled 13% to 4,170 on March 8. It then rallied to 4,631 on March 29, but then fell again hitting a closing low of 4,146 on Thursday, reflecting a max drawdown (i.e. the biggest intra-year sell-off) of 14%.
It’s understandably unsettling to see the markets shed so much value.
However, this year’s moves are nothing out of the ordinary. Since 1950, the S&P has seen an average annual max drawdown of 14%.
JPMorgan Asset Management illustrated this phenomenon in the chart below, which also shows that the S&P still managed to generate positive returns in 32 of 42 years that saw intra-year drops of 14%.
And while an oncoming recession has historically been pretty bad for stock, most economists seem to agree that the economic data points to continued economic growth.
Assuming the economy does avoid going into recession, the current selling may be reflecting a growth scare.
Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets reviewed, reviewed how the S&P 500 performed around four recent growth scares — which came with drawdowns ranging between 14.2% and 19.8%.
“If a median growth scare drawdown of 17.7% occurs, the S&P 500 would fall to ~3,950 this time around, while a late-2018-type drawdown of -19.8% would take the S&P 500 to ~3,850,” she observed in a note to clients on Tuesday.
She also pointed out that following the market troughs, the six-month returns ranged from 18.2% and 28.6%. The 12-month returns ranged from 26.6% to 32.0%. It’s a reminder that some of the sharpest rallies in the market occur during the biggest sell-offs.
Now there are all sorts of factors that make current market conditions unique to history. And of course, history doesn’t always repeat.
But don’t be surprised if the current bout of volatility eventually becomes forgotten as another stat in stock market history. Because so far, the market’s moves have been in line with the historical averages.