This is part one of a two-part post on recent market declines. It contains what I call “The What”, defining the declines and trying to give some historical perspective. Part two will contain “The Why” by trying to summarize, in layman’s terms, what is causing the market angst at the moment and what to do about it (hint: stick to the plan).
There is an old investment adage which states that “risk happens fast”. From all-time highs in late September, the S&P 500 (US Large Cap Stocks) has declined about 7.5% over the past 2 ½ months. While the percentage declines aren’t anything out of the norm, the daily swings feel massive given the higher levels for each index than we’re all used to and the relative calm we’ve experienced over the past few years. Here are some stats to help get your head around what’s happening and why it’s not out of the ordinary:
- Per Factset, over the last 40 years, the maximum yearly drawdown from peak on the S&P 500 has been:
- 0-5%: 3 times
- 5-10%: 15 times
- 10-20%: 17 times
- 20-30%: 2 times
- 30-50%: 3 times
At 7.5%, we’re not even up to the typical downturn at this point.
- Research by Robert Frey, expanded on recently by Ben Carlson, shows that while markets generally move up over the long-term, they’re in a drawn down state (down significantly from peak) nearly half the time. Specifically, looking at all the monthly closing index values, dating all the way back to 1927, the S&P 500 has been:
- 5-10% below its most recent peak 12.8% of the time
- 10-20% below its most recent peak 13.1% of the time
- 20% or more below its most recent peak 23.1% of the time.
That means that in total, we’re living in a period where stocks are down at least 5%, 49% of the time!
- Charlie Bilello of Pension Partners looked at daily moves in the S&P 500 (which seem extreme over the past few months… 3%+ down yesterday, 12/4 for example). Since 1928, the average number of days per year with 1%, 2%, and 3% moves are:
- 1% Moves: 60 per year
- 2% Moves: 17 per year
- 3% Moves: 7 per year
In 2018, we’ve had (56) 1% days, (15) 2% days, and (5) 3% days… right in line with average. Why does it feel so much more volatile than average? Because, in general, we tend to weight recent history more strongly than extended history and in 2017, we only had (8) 1% days, and no 2% or 3% days. That kind of stability is what’s rare, not the moves we’ve seen recently.
While all of the above considers the S&P 500, it is important to note that foreign stocks are off quite a bit more than the S&P 500. Foreign developed countries are down 16.5% in US Dollar terms from their most recent high early in 2018 and foreign emerging countries are down 19%. Of course we also have to expect more volatility in foreign markets (especially emerging markets), to go along with their higher expectation for future growth and future returns. In that light, even those drawdowns are far from extreme levels.
I hope that helps to put the extent of the recent market decline in perspective. As I type this message, futures are pointing to another down day tomorrow (currently a bit more than 1%, but as much as 2% earlier) as Canada has apparently arrested the CFO of one of China’s telecom equipment companies that is wanted in the US for alleged violations of US sanctions on Iran. Futures sold off on fears that this would drive a wedge between US/China trade talks that just recently gave the first glimmer of potential progress. More here from CNBC for those who are interested in the full story. Whatever the reason, just remember that an average year contains 17 days with 2% moves in the stock market. These are normal occurrences in response to short-term news that will barely be remembered a few years from now. Remember all the angst over Cypress a few years ago? I’d bet just barely, if at all, and that is exactly my point.
[tags Perspective, Stocks, S&P 500, Historical Returns, Drawdowns]