Updated: Oct 10, 2022
We are approximately 9 months into a bear market in the S&P 500 Index with a drawdown of about -25%. Is there more pain to come or is the worst behind us? I think the first step toward answering that question is to look at the data of historical drawdowns. We'll focus on the depth and duration of the top 10 drawdowns for the S&P 500 Index over the past 50 years.
The trough date and trough length represent the date and number of days from the peak value of the S&P 500 Index to the deepest trough. The end date and recovery length represent the date and number of days from the trough back to the initial peak value of the S&P 500 Index. What becomes apparent after looking at the data is that each of these drawdowns varies dramatically in their duration. We are 190 days into the current -24.3% drawdown and the average trough length is 291 days and the average drawdown is -37.2%.
The other aspect of this data that is evident is that the recovery length is almost 2x the trough length. Bear markets tend to occur much quicker than their recovery and this provides for some very brutal days on the way down. As a result, intraday momentum strategies can benefit greatly during a bear market.
Given the current economic conditions, we are likely closer to the bottom than we are from the peak, but there may be some more pain ahead until we finally trough. Being able to avoid these bear markets is key to earning a high return on capital over long periods of time, which is why utilizing long and short trades in a variety of markets is important.