Speed Bump or Something More?

October 17, 2014

Over the past couple weeks, financial markets have suffered steep declines with the Dow Jones Industrial Average falling over 800 points, leaving investors to wonder if this is simply the pullback that we have been waiting for or if larger losses loom on the horizon. 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 500¹ Index for the last 30 years.

Since 1984, 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 2014, the maximum drawdown is what we are currently experiencing, a drop of 7.4%. Based on this data our present drawdown, while significant, is not out of the ordinary. Though it is impossible to precisely predict the length and magnitude of the current market slide, investors can derive some comfort knowing that an intra-year drawdown like this is not uncommon. Additionally – at the time of writing – the S&P 500 index is still positive year to date, and bond returns are also in positive territory for the year.

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