This data from Zerodha highlights how drawdowns have evolved over the decades, showing a clear shift in market behavior. In the 1980s, 1990s, and 2000s, large and frequent drawdowns were the norm. In the 2000s, for example, 37% of the time was spent in a 30% or more drawdown, while only 34% of the time was spent within 0-10% drawdown or at all-time highs.
Declining Drawdowns in Recent Decades
The trend started changing in the 2010s, where 64% of the time was spent in the 0-10% drawdown range. The 2020s, however, have been exceptional, with 86% of the time spent within a 10% drawdown. Only 3% of the time has the market dipped below 20%, indicating that sharp and prolonged corrections have become increasingly rare.
The Role of Liquidity and Policy Support
One key reason for this shift is the abundance of liquidity. Whenever markets have shown weakness in the last two decades, new liquidity has been injected, preventing deeper declines. This has led to a much smoother market experience for investors today compared to past decades, where 10-20% daily circuit moves and highly volatile conditions were more common.
A Favorable Environment for Investors
With 74% of the time spent within a 0-10% drawdown range, this decade offers one of the best environments for long-term investors. While past decades required navigating prolonged and painful bear markets, the structural shift in market behavior has made investing much less stressful.
Looking Ahead
Although the market structure has become more supportive of shallow drawdowns, investors should remain cautious about complacency. History shows that market conditions evolve, and while liquidity remains a powerful force, risks of corrections still exist. Let me know your thoughts on this trend.
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