Economic Update: Significant Stock Market Volatility

Stock market volatility has picked up significantly recently. For example, the tech-heavy NASDAQ, which outperformed throughout the pandemic, ended last week down 21.16 percent year-to-date, i.e. “bear market” territory.

Similarly, the benchmark S&P 500 is currently having one of its worst starts to a year in the past three decades (even worse than 2020). The good news is that the selloff has been extremely rapid and when looking at past instances when the broad index took such a short period of time to fall by a comparable amount the S&P 500 was positive every single time six months later. The market could of course remain under pressure in the near-term and even deeper selloffs are possible, especially given the still-elevated level of macro, policy, and geopolitical risk.

However, perhaps more important is to remember that large drawdowns are far from uncommon when investing. Indeed, the S&P 500 since 1980 has experienced an average intra-year peak-to-trough decline of 14 percent but still managed to end the year with a positive return more than three-quarters of the time during these past four decades. The current drawdown as of last Friday’s close is -13.86 percent, so right in line with historical norms. And even if the recent selling pressure intensifies enough for the S&P 500 to eventually enter bear market territory, i.e. a 20 percent decline, the following statistics in such an event may prove comforting. Specifically, since 1929 the typical bear market has lasted 19.5 months, with an average max drawdown of 38.9 percent.

What is more important, though, is that during this same sample period the typical bull market in the S&P 500 has lasted for 62.5 months and experienced an average gain of 182.7 percent. Altogether this implies that over the past century stocks have not only spent significantly more time in a bull market than a bear market, but also that the gains often greatly exceeded the declines. This is another example of why regular investors are generally told to focus on the long-term rather than the day-to-day fluctuations in the market. Of course given how violent the declines have been lately it is easy to understand why some investors may have a hard time remaining calm when markets are plunging even though historically refraining from panic selling has tended to be a smarter course of action.

For example, from January 2000 to the end of 2019 (to exclude pandemic-related outliers), 24 of the 25 worst trading days occurred within a single month of the 25 best trading days, and 6 of the 10 best days occurred within two weeks of the 10 worst days. It is worth pointing out, though, that despite these reassuring statistics it is important to remember that past performance does not guarantee future returns, and there is still a lot of uncertainty surrounding inflation, the election, Fed policy, and other issues that could keep market volatility elevated in the near-term. Any investors unsure how to navigate this environment may want to consult with a professional financial advisor and make sure their positioning is properly aligned with their risk tolerance, retirement goals, and other unique variables. As always, we are here to help with any questions you may have.

What To Watch This Week

Monday

  • 2-Yr Note Settlement
  • 5-Yr Note Settlement
  • 7-Yr Note Settlement
  • 20-Yr Bond Settlement
  • PMI Manufacturing Final 9:45 AM ET
  • ISM Manufacturing Index 10:00 AM ET
  • Construction Spending 10:00 AM ET

Tuesday

  • FOMC Meeting Begins
  • Factory Orders 10:00 AM ET
  • JOLTS 10:00 AM ET

Wednesday

  • MBA Mortgage Applications 7:00 AM ET
  • ADP Employment Report 8:15 AM ET
  • International Trade in Goods and Services 8:30 AM ET
  • 3-Yr Note Announcement 8:30 AM ET
  • 10-Yr Note Announcement 8:30 AM ET
  • 30-Yr Bond Announcement 8:30 AM ET
  • Treasury Refunding Announcement 8:30 AM ET
  • PMI Composite Final 9:45 AM ET
  • ISM Services Index 10:00 AM ET
  • EIA Petroleum Status Report 10:30 AM ET
  • FOMC Announcement 2:00 PM ET
  • Fed Chair Press Conference 2:30 PM ET

Thursday

  • OPEC Meeting
  • Challenger Job-Cut Report 7:30 AM ET
  • Jobless Claims 8:30 AM ET
  • Productivity and Costs 8:30 AM ET
  • EIA Natural Gas Report 10:30 AM ET

Friday

  • Employment Situation 8:30 AM ET
  • John Williams Speaks 9:15 AM ET
  • Baker Hughes Rig Count 1:00 PM ET
  • Consumer Credit 3:00 PM ET
  • Raphael Bostic Speaks 3:20 PM ET
  • Mary Daly Speaks 8:00 PM ET
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