Historical Perspective on Drawdowns

By: Mike Earl, CFP^®, CPWA^®

Stock market drawdowns are normal. They’re never fun, but they are a routine occurrence. As of market close on October 11, 2018, the S&P 500 Index was down 6.9% from its recent high on September 20.

A stock market correction is defined as a 10% decline in the U.S. stock market. So at this point, we  haven’t even entered “correction” territory. This is still a blip. But people take notice when we have big down days, as we did on Wednesday, October 10. On that day, the U.S. stock market was down more than 3%. The basic scare tactic of the media is to quote the loss in terms of points lost on the Dow. On Wednesday, the Dow shed more than 800 points. It sounds really ominous, right?

If the Dow were trading at 6,700 (as it did back in the spring of 2009), an 800 point decline would equate to a shocking 12% decline. But when the Dow is trading above 26,000 (as it was earlier this week), an 800 point decline equates to just a 3.1% decline.

Stated simply: I don’t care how many points the Dow was down. We need to quote declines in terms of percentages, which then provides context.

Is a 3% down day in the market abnormal? It’s not: 3% down days happen about 3.6 times per year, dating back to 1928 (via Ben Carlson). So it’s not that unusual.

Over the past 38 years, the S&P 500 Index has ended the year positive about 76% of the time. So in a four-year period, you would be up in three of those four years. In spite of those exceptional long-term results, the average drop within any single calendar year is 13.8%. Thus, corrections are very normal.

Sources:

1) Ben Carlson, https://awealthofcommonsense.com/2018/10/big-down-days/

Because The Wealth Group, Austin B. Colby & Associates is independent of Raymond James, the expressed written opinions above are our own and not necessarily reflective of Raymond James’ opinions.