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.
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