As of the close of market on June 13, 2022, the S&P 500 has receded to levels that were last seen in February 2021 which is officially a bear market as defined by a 20% drawdown from the peak. Obviously for an investor, it is never ideal to experience a drawdown of any size, but drawdowns are expected and have occurred with regular frequency. In fact, over the last 40 calendar years, the S&P 500 index has experienced an average drawdown from ‘peak to trough’ of roughly 14%[1] (see below).
Additionally, there have been 6 other periods where the S&P 500 experienced a bear market, but these periods of decline did not always result in a down year. As the chart shows, three of those six periods ended positive for the calendar year (2020, 2009 & 1987). This means that although market declines are common, they do not always end that way. The average bear market duration has historically lasted 10 months vs bull markets that have an average duration of 55 months[2] (see below).
While the sting of market declines can be hard to bear, it’s crucial for investors to remain committed to their strategy. Pretending that you can avoid volatility, rather than learning to live with it, can result in costly mistakes. It’s also essential to recognize that during market slumps, volatility isn’t a flaw but the very essence of it. Without volatility, there’d be no ‘risk-premium’, resulting in long-term returns mirroring those of risk-free ventures like money markets. For investors seeking returns that outpace inflation, understanding and accepting the inherent volatility is vital because drawdowns not only happen, but they are also expected.
*Past performance is no guarantee of future results
[1] https://www.calamos.com/insights/volatility-opportunity-guide/significant-intra-year-drawdowns-are-common/
[2] Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. In USD. Chart end date is December 31, 2021; the last trough to peak return of 119% represents the return through December 2021. Due to availability of data, monthly returns are used January 1926 through December 1989; daily returns are used January 1990 through present. Periods in which cumulative return from peak is –20% or lower and a recovery of 20% from trough has not yet occurred are considered Bear markets. Bull markets are subsequent rises following the bear market trough through the next recovery of at least 20%. The chart shows bear markets and bull markets, the number of months they lasted and the associated cumulative performance for each market period. Results for different time periods could differ from the results shown. A logarithmic scale is a nonlinear scale in which the numbers shown are a set distance along the axis and the increments are a power, or logarithm, of a base number. This allows data over a wide range of values to be displayed in a condensed way. Source: S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
