Market concentration alone does not cause a big downturn. Neither is a long, steep rally. Some measurements show U.S. stocks are having one of their best rallies in over 50 years and on record. Unmatched since 1971, the S&P 500 increased 16 of 18 weeks, gaining approximately 25%.
Nvidia (NVDA.O), opens new tab losing more than 10% of its value since Friday, may be the first indicator of a consolidation or downturn. Deutsche Bank analysts believe the S&P 500 has risen 21.5% or more in four months five times since WWII. Four were during recession recovery, and one was during the dotcom bubble.
There is no formula for a drawdown, and history shows they vary. Recovery periods, the time between the market's high-water mark and its next breach, vary widely. Stocks fell 79% in real terms during 1929-1932, and full recovery, including reinvested income, took 15 years until February 1945.
The dotcom crash's 52% real terms fall and recovery took 7-1/2 years, but the market's 2020 35% real terms pandemic slump recovered in five months.
There is a correlation between an investor's risk tolerance and their investment horizon and their drawdown tolerance.
Crises in the economy, the financial sector, and politics come and go, but equity prices continue to rise over time.
In the event that you have the stomach and patience to ride out volatility, it may be more advantageous to sit tight.
A shock was typically the cause of the most significant drawdowns, such as those that occurred in 2008, 2020, or 2022. "We advise against panicking and selling, especially for pensions, retirement accounts, and endowments," said Olaolu Aganga, chief investment officer for Mercer in the United States.
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