Calendar Year Returns Are Deceiving
Another way to get a sense of the market’s historical risk is to look at the calendar-year returns of the S&P 500 Index, a gauge of the performance of larger-company U.S. stocks, relative to the largest drawdowns that occurred in each of those years. The “drawdown” is the largest peak-to-trough loss that occurred in each of those years.
The blue bars in Figure 2 show, as one might expect, that the S&P 500 has experienced positive returns in the vast majority of years. However, the orange bars show that in a large majority of those years, the market experienced significant losses at some point during that year.
For example, while in 1998 and 1999, the S&P 500 was up 28.6 and 21.0 percent, respectively, in those same years, the S&P 500 had intrayear losses of 19.3 and 12.1 percent. This shows that in virtually all years, the market has a substantial “correction,” even in some years where the market is up strongly.
Since investors experience the pain of losses over shorter periods, we can also examine risk over a monthly horizon. As Figure 3 shows, since 1950, the S&P 500 has had 558 months with intramonth losses exceeding 2 percent; 182 months with losses exceeding 5 percent; 31 months with losses exceeding 10 percent; and 8 months with losses exceeding 15 percent.
