Market Snapshot: Viewing Drawdowns as a Bump in the Road

Based on our analysis, a 5% drawdown is just under twice as likely to be a non-event (less than -10% peak drawdown) versus becoming a correction (a price decline of 10% but less than 20% from the 52-week high), bear market (a price decline between 20%-30% from the 52-week high) or crash (a price decline of 30% from the 52-week high).

Over the past 50 years, the S&P 500 experienced 66 unique 5% drawdown periods¹ from the respective 52-week high, with the most recent occurring on Friday, April 19, 2024. As noted in the chart, a correction occurred in 17 of the previous 65 drawdowns, a bear market in 2 of the 65 drawdown periods, and a crash in 5 of the 65 drawdown periods. In other words, a 5% drawdown has historically been 1.7x more likely to experience a max drawdown above correction territory than to experience a correction, bear market or crash. The average max drawdown during these periods was 11.8% with a max median drawdown of 8.1%. The average number of trading days before the index saw a new 52-week high was 114 days, with a range of two days to 842 days, and a median of 51.

If the S&P 500 Index did not make a new 52-time high within the next 100 trading days (19 observations), there was ~90% probability that the market experienced a max drawdown of 10% or more (17 of the 19 observations). If the S&P 500 made a new 52-week high in the next 50 trading days (32 observations), only 3% of the observations saw a correction or worse (1 of 32 observations). Of the 32 observations when the S&P 500 saw a new 52-week high in the next 50 trading days, 35% of the observations saw the max drawdown on the first day of the drawdown period (11 of 32 observations). While 5% pullbacks may raise investor concerns of more sizable drawdowns ahead, history would suggest they are statistically more likely to be a financial bump in the road rather than a major detour to higher returns.