Where is the decline?

The chart above, created by JP Morgan, shows the calendar year returns on the S&P 500 Index and the intra-year drops that occurred during those years. This reveals an interesting picture. The average annual return since 1980 is 8.4%, a number which will likely ring a bell for investors familiar with long-term equity returns.

But it is perhaps less well-known that the S&P 500 Index also recorded an average intra-year drop of 13.9%. So, on average, investors have had to deal with a significant decline in stock prices in every year.

So far this year, including the current drop in equity futures because of US President Trump’s tweets on increasing tariffs on Chinese imports, the maximum intra-year decline is just 2%. The odds that it will stay like this are slim. Out of the 39 calendar years since 1980, the intra-year drawdown was less than 5% in just 2 occasions. That’s a realized probability of 5%. In fact, there is a small majority of 56% of years with an intra-year decline of more than 10%.

Based on historical data it is not unlikely that we will see a bigger intra-year decline of the S&P 500 Index than we have seen so far this year. In fact, a bigger decline could be evolving as we speak as equity markets are not happy with President Trump’s ‘tariff-tweeting.’ However, given what is at stake, Trump’s re-election among others, some kind of trade deal later on, should not be ruled out. Together with decent global growth and still accommodative central banks this should benefit equity markets further down the road. This makes anticipating a potential sell-off somewhere this year challenging at least.

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