Monday, June 26, 2017

The Meaning of Small Drawdowns

With the first half of 2017 nearly complete, the S&P 500 has 24 all-time closing highs since the year started. The worst sell-off the S&P 500 has seen from a closing basis this year was a 2.8 percent decline over 32 trading days, from March 1st through April 13th.

The only other year in the S&P 500’s history that saw a smaller maximum drawdown in the first half of the year was 1995. That's significant because in years where the S&P 500 saw smaller than average pullbacks in the first half of the year, the second half of the year also generally saw smaller than average drawdowns. Of the 16 years since 1928 with a maximum drawdown of less than 5 percent in the first half, the S&P 500 averaged a maximum drawdown of 6.3 percent in the second half, which is well below the average 12.2 percent decline for all years.

The returns were also better than average. In the same 16 years, the S&P 500 averaged a gain of 7.8 percent in the second half, with positive returns 81.3 percent of the time. That’s twice the 3.9 percent average second half return for the S&P 500 in all years, and also more consistent than the 66.3 percent frequency of second half gains for all years.

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