A giant market selloff would be totally normal
History says the stock market could be due for a big selloff.
Why it matters: Historically, bull markets rarely happen in the form of a smooth line, up and to the right. And so, long-term investors shouldn’t be surprised to see a period of poor returns.
By the numbers: The S&P 500 bottomed on March 23, 2020, which means we’re three months into year two of the bull market.
- Since 1945, the average bull market saw a max drawdown — or its largest peak-to-trough selloff — of 10% during year two, according to BMO Capital Markets.
- These drawdowns ranged from down 5.1% to 16%.
- Since March 23, 2021, the S&P has seen a max drawdown of just 4%.
What they’re saying: "Look at last year at this time," LPL Financial’s chief market strategist Ryan Detrick tells Axios. "We were in the midst of a five-month win streak, yet saw millions of people lose their jobs."
- "The stock market is all about the future and all of that bad news was priced into the pie.”
- “Year two is the opposite, as stocks sport weaker returns, while the economy is actually much stronger. But again, much of the recovery is priced into things, so it is harder for stocks to surprise to the upside.”
Yes, but: "The good news is the second year of every single bull market since World War II has seen the S&P 500 climb higher," Detrick wrote in a note.
- The average year two generated a strong 12.6% return.