Speed Bump Ahead?

March 07, 2013 | Doug Oest, CAIA, Managing Partner

With the Dow Jones Industrial Average setting a new nominal high this week and the CBOE Volatility Index below 14, the financial news media has been beset with headlines about the recent rally in the U.S. equity markets. Analysts’ views on the sustainability of the rally are mixed, but it is not uncommon to hear market experts warn of a pullback to interrupt the recent rally. While some may be pointing to underlying fundamentals or economic data, one could simply point to history as an indicator. This week’s chart looks at the maximum intra-year drawdown for the S&P 500 Index¹  for the last 30 years.

Since 1983, the S&P 500 Index has only had five negative calendar years. Despite this fact, 25 out of the last 30 calendar years have had an intra-year drawdown of more than -7%, and the median calendar year maximum drawdown over the last 30 years was just over -10%. Year to date in 2013, the maximum drawdown is -2.8%. Therefore, based on this data, it seems reasonable that we will see a larger drawdown at some point this year. While returns may come in above 8% again for 2013, it is unlikely that the markets will rise at a steady pace each week.

¹We use the S&P 500 instead of Dow Jones Industrial Average because it is a more commonly used benchmark by institutional investors