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While a correction may be unexpected, drawdowns in the market are the norm. The S&P 500 has been in some form a drawdown 93% of the time since 1950 (in other words, 7% of all trading days have been at record highs). As highlighted below, drawdowns of less than 5% from a record high are the most common, occurring in roughly 37% of all trading days. Pullbacks that exceed 5% but not 10% occur about 15% of the time, while bear market drawdowns of at least 20% represent roughly 21% of all trading days.
Analysis based on drawdowns from record highs on the S&P 500 since 1950.
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.
There are plenty of catalysts underpinning the recent advance in stocks. President Trump brings a pro-growth agenda to Washington, along with expectations of reduced regulations and the prospect of lower taxes. Several major bank CEOs have recently highlighted the elevated enthusiasm for the new administration among their corporate clients.
Many of these major banks also reported fourth-quarter earnings that handily exceeded forecasts, adding another tailwind to the latest rebound. Outside of improving net interest margins and a jump in investment banking activity and trading revenue, there were also positive takeaways at the consumer level as credit and debit card sales notably picked up last quarter for several of the big banks.
At the macro level, a cooler-than-expected core Consumer Price Index (CPI) report last week helped assuage inflation fears and keep rate-cut expectations on the table. This translated into a sharp pullback in interest rates, including a notable 0.13% drop in 10-year Treasury yields. And while the pullback was encouraging, it was not enough to reverse the developing uptrend in yields. Technically, a move below support near 4.45% would be a good sign of the cycle high being reached earlier this month.
With the stock market nearing record-high levels, it might seem premature to talk about a potential correction — characterized by a market drawdown of 10% or more but less than 20%. However, bull markets are not linear, and corrections, though relatively improbable, are always possible.
According to our friends at Ned Davis Research, a correction has occurred every 1.1 years going back to 1928. Furthermore, the last time the market entered an official correction was 309 trading days ago, spanning well beyond the average number of 173 trading days without a correction since 1928.
