When markets are flashing red, the natural tendency is to sell. Looking at history though, the more the S&P 500 is down, the better it does the following year on average.
The analysis examines the performance of the S&P 500 in relation to the extent of drawdown, which is the measure of how far the index has declined from its highest point over the preceding year.
While these figures represent averages and individual outcomes can vary significantly around these averages, they provide a broad perspective on the historical performance trends of the S&P 500 in different drawdown scenarios.
The Bigger the Drawdown the Better the Outlook S&P 500 Index Returns after various drawdowns (1950-2022)
Here are some key takeaways from the information provided:
- For significant drawdowns, there is less clarity regarding the market performance over the next 3-6 months on average, but trends become more apparent over a one-year period.
- Following a drawdown of 10% or more, the average one-year return tends to improve as the drawdown severity increases.
- After surpassing a 15% drawdown, the subsequent one-year return typically exceeds the average of 9%.
- Drawdowns classified as bear market territory (exceeding 20%) represent just under 8% of the data points, with a historical average return of 18.43% over the following year.
