After last year’s relative calm in equity markets (the max drawdown for the S&P 500 in 2021 was just 6%) volatility has returned. Three weeks into 2022 the S&P 500 is down nearly 8% (and almost 9% below its January high), while the NASDAQ is officially in a correction and down 12% YTD (and off nearly 15% from its November 2021 high).
The abrupt correction in the NASDAQ has been a wake-up call for many and a reminder of one key tenet of investing: markets are volatile. While we’ve seen a lull of non-volatility in recent years, when investing it’s important to keep in mind just how volatile the market is (and can be) over short periods of time.
Importantly, we do not view this current drawdown as a cause for investors to panic (we still see economic strength in 2022 – See our 2022 Outlook), but instead view it as a return to more “normal” market environments.
To emphasize that point what follows is an overview of historic volatility and what investors can expect in “normal” environment.
Market drawdowns happen
Look at any given year for S&P 500, positive or negative, and at some point in the year the market experienced a drawdown. Drawdowns and declines are a part of investing, however so is having a long-term plan and vision.
The chart below shows the annual return of the S&P 500 every year since 1957, and the accompanying intrayear decline. The important takeaway is that while every year has experienced a drawdown of some magnitude, the market has never finished at its lowest point.
S&P 500 Annual Return vs. Intra-year Drawdown
Looking at this data we see one key takeaway: the market finishes the year positive 72% of the time. And breaking down the intra-year declines in more detail we discover two additional things:
First: 67% of time there is an intra-year drawdown of 5% – 20%, regardless of market performance.
Second: Even in years the S&P 500 experienced positive performance there was an average intra-year decline of 10.8%
Volatility is a part of investing
Since the late-1990s volatility in the stock market has intensified. While the market has gone through periods where it’s softened (2004 – 2007, 2013-2018), in a given calendar year investors can expect to experience an average of:
- 12 days where the market moves +/- 2%
- 3 days where the market moves +/- 3%
- 2 days where the market moves +/- 4%
- and 1 one day where the market moves +/- 5%
So far this year (2022) there hasn’t been a single day where the S&P 500 finished +/- 2% (or more). And so while the volatility investors are feeling in markets right now is intensify, in the perspective a typical year for equity markets it remains normal.
Daily Returns Distribution of the S&P 500 by Year
Volatility and drawdowns are always difficult to live through. But for every investor that has been able to stay invested (and even deploy new monies), the long-run rewards have been positive.
Where the market will finish this year is anyone’s guess. But based on history the current downtrend could continue and the market still finish the year with positive performance.
All of this ties back to the idea that for investors the best course of action is to have a long-run plan, and keep a diversified portfolio across asset classes and investments.
ENDNOTES
Disclosures
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.