My favorite visualization of short-term stock market performance 📊
Every investor should pin this 📌
I first saw a version of this chart back in 2013, when I was the markets editor at Business Insider.
Since then, I’ve looked at it over and over again to remind myself of how volatile the stock market can be over short-term periods.1
It comes from JPMorgan Asset Management’s regularly updated Guide to the Markets. Going back to 1980, the chart shows each year’s annual return for the S&P 500 in gray and its intra-year max drawdown (i.e., a decline from its high) in red.
There are a few observations to note2:
The market usually gains more than it loses. As you can see in the chart, the S&P 500 ended the year positive in 32 of the 42 years measured. This means that in most years, the market has recovered the losses experienced in the max drawdown.
The market can quickly recover huge losses. 1987, 2009, and 2020 had larger max drawdowns than what we’ve experienced so far this year, yet the market closed each of those years higher. It’s unusual for this to happen, but it’s not unprecedented.
Average rarely happens. You might’ve been told at some point that the stock market has historically returned about 10% on average. But there are very few years when the market has actually risen by 10%. That average is a function of many better-than-average years, many lackluster years, and a handful of pretty awful years.
Stomach-churning sell-offs like the one we’re living through right now are not unprecedented. It speaks to two conflicting realities investors must cope with: In the long run, things almost always work out for the better, but in the short run, anything and everything can go wrong. This is what investing is all about.
The worst first half since 1970
Almost every major media publication ran with a headline that employed a phrase like “worst first half since 1970”3 to describe the stock market’s performance so far this year.
And it’s accurate. Down 20.6% from January through June, the S&P 500 had an unusually bad sell-off for that specific six-month stretch.
Ben Carlson at Ritholtz Wealth Management had a slightly different way of looking at it. In a blog post on Saturday, he charted the rolling six-month returns on the S&P 500 (i.e., all six-month periods, not just the period from January through June).
“The only 6 month performance numbers that were worse than what we just lived through occurred during the Great Depression, 1937 crash, WWII, 1970s bear market, bursting of the dot-com bubble and 2008 crash,” Carlson observed.
In other words, losses greater than 20.6% over six month periods are still incredibly rare. But they have occurred two other times since the 1970 experience everyone has been talking about.
This is not to downplay the severity of the declines. Indeed, those other periods have represented some frightening times for investors. It’s just a reminder that it’s not as uncommon if you take a more holistic view of the historical data.
Importantly, it’s also a reminder that the market has always bounced back — even from the most intense sell-offs — and gotten stronger over the long term.
More from TKer:
Here’s a sampling of some headlines. You couldn’t have missed it:
“S&P 500 posts worst first half since 1970“ - NBC News
“Stocks suffered their worst first half of the year since 1970“ - CBS News
“S&P 500 wraps worst first half since 1970“ - Fox Business
“The stock market had its worst first half since 1970“ - Axios
“S&P 500 ends brutal first half '22 with largest percentage loss since 1970“ - Reuters
“The S&P 500 Had Its Worst First Half Since 1970“ - Barron’s
“Stocks Close Out Worst First Half Of A Year Since 1970“ - Forbes
“Stocks slide, with Wall Street closing out its worst first half since 1970“ - Washington Post
“Stocks slide to close worst first half in 52 years“ - Yahoo Finance
“After Stock Market’s Worst Start in 50 Years, Some See More Pain Ahead“ - NY Times
“Stock Markets Post Worst First Half of a Year in Over Five Decades“ - WSJ