How Markets Respond To Drawdowns

When markets are down, the natural bias is to sell. From looking at history, the more the S&P 500 is down, the better it does in the next year on average.

As shown in the chart below, the S&P 500 has performed based on how far down we are from the highest point over the prior year. That’s the “drawdown.” These are averages and there’s a big range of individual outcomes around each one, however the averages do tell a story.

A few highlights from the chart above worth noting include:

  • Once you get past a 10% drawdown, the subsequent average one-year return improves as the drawdown continues.
  • When you’re down at least 15%, the subsequent one-year return is above average.
  • The average one-year return when in the drawdown range we’re experiencing right now (-20% to -25%) is 11.5%.

History is always a good starting point for evaluating where things may go moving forward. Looking at similar markets to where we are now, the takeaway is that market could rebound to the upside.

Our Covenant Wealth Strategies' Investment Team is closely monitoring a variety of signals and indicators to make appropriate and wise investment decisions. We do anticipate near-term volatility. While market turbulence cannot be avoided, it also need not deter us from making progress toward our financial goals. It is important to remember that good investment decisions see beyond the current circumstances.

If you have specific questions or would like to discuss your own investment strategy or financial planning needs, we welcome you to call us at 302.234.5655 or email us at to set up time to discuss further.


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