If you’re like us, you’ve heard a lot of people reference the recent equity declines as a sign that the market is pricing in some sort of Armageddon in the US economy.  While comments like that make for great soundbites, a little perspective is in order.  Since the S&P 500’s high on February 19th, the S&P 500 is down 12.8%.  In the chart below, we show the S&P 500’s annual maximum drawdown by year going back to 1928. In the entire history of the index, the median maximum drawdown from a YTD high is 13.05%.  In other words, this year’s decline is actually less than normal.  Perhaps due to the fact that we have only seen one larger-than-average drawdown in the last eight years is why this one feels so bad.

The fact that the current decline has only been inline with the historical norm raises a number of questions.  For example, if the market has already priced in the worst-case scenario, going out and adding some equity exposure would be a no brainer.  However, if we’re only in the midst of a ‘normal’ drawdown in the equity market as the coronavirus outbreak threatens to put the economy into a recession, one could argue that things for the stock market could get worse before they get better, especially when we know that the market can be prone to over-reaction in both directions.  The fact is that nobody knows right now how this entire outbreak will play out.  If it really is a black swan, the market definitely has further to fall and now would present a great opportunity to sell more equities. However, if it proves to be temporary and after a quarter or two resolves itself and the economy gets back on the path it was on at the start of the year, then the magnitude of the current decline is probably appropriate.  As they say, that’s what makes a market! Start a two-week free trial to Bespoke Institutional to access all of our research an interactive research tools.

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