Two Charts, One Apparent Contradiction
Take a look at these two charts. Both show the Dow Jones in "x6 years" — that is 1896, 1906, 1916, … through 2026. A total of 12 years, averaged.
Chart 1: The Avg Return Pattern
The purple line rises steadily from 0% to around +7% by year-end. The gold line shows 2026 — currently in negative territory, but that is a different story.
Chart 2: The Avg Drawdown Pattern
The purple line tends to fall further and further into negative territory — from 0% in January to around –6% in December.
The obvious question: if return is rising, shouldn't the drawdown eventually move back towards zero?
Why Both Can Be True Simultaneously
The answer lies in the way both metrics are calculated.
Return measures the price gain since the start of the year. Starts at 0%, rises with every gain, falls with every loss. At year-end it shows the total performance.
Drawdown measures the distance from the current yearly high. Starts at 0%, falls with every pullback. And here is the crucial point: the drawdown can only return to zero when the price reaches a new yearly high. As long as the price remains below its highest point of the year, the drawdown stays negative — even if the total return is positive.
An example: the Dow Jones rises from January through March by 10%. In April it falls by 5%. The return stands at +5% (still positive). The drawdown stands at –5% (distance from the March high). Only when the Dow Jones surpasses the March high does the drawdown return to zero.
The Averaging Effect: Why the Avg Drawdown Keeps Falling
Now it gets interesting. In a single year the drawdown naturally often moves back towards zero — namely whenever a new high is reached. That happens multiple times in most stock market years.
But the chart shows the average across 12 different years. And the crashes in those years occur at completely different points in time:
- 1906: Trough in autumn (Bankers' Panic)
- 1946: Trough in October (post-war correction)
- 1966: Trough in October (bear market)
- 2016: Trough in February (China concerns), quick recovery
When you stack 12 drawdown patterns on top of each other and calculate the mean, the following happens: in January all start at zero. In the early months some fall into negative territory, others do not. As the year progresses, new drawdowns keep being added — in different years, at different points in time. Some years recover, others do not.
The result: the average tends to fall continuously, because at any given point in time at least a few years are in a drawdown. The recoveries of individual years do not fully offset this.
Even More Illustrative: 12 Individual Years
Imagine 12 athletes running a marathon. The average speed (= return) rises because most run steadily. But the average "gap to personal best pace" (= drawdown) grows throughout the day — because someone is always having a rough patch, even while others are running a personal best.
Return measures: "where do I stand overall?"
Drawdown measures: "how far am I from my best point?"
Both can simultaneously point in different directions.
What Does This Tell Us as Investors?
Three important insights:
- Return alone is not enough. A strategy with +10% annual return and –30% drawdown feels brutally different from one with +10% and –8% drawdown. The drawdown shows the emotional burden.
- The second half of the year is riskier. The avg drawdown deepens noticeably from May onwards. This aligns with the historical "Sell in May" pattern — not because of falling returns, but because of deeper pullbacks from the yearly high.
- Compare the current drawdown with the historical average. The gold 2026 line in the chart shows: the current year is presently below the historical average of the x6 cohort. On SeasonAlpha you can see this for any ticker immediately — including percentile ranking.
How to Find the Charts on SeasonAlpha
- Open seasonalpha.ai
- Navigate to Decade Cycle (sidebar)
- The first chart shows the avg return pattern by last digit
- Scroll down to Drawdown & Risk
- There you find the avg drawdown pattern — with the current year as a gold line
You can use the sidebar to show and hide individual decades, switch the ticker, and adjust the rolling volatility.
Further Reading: The Worst Crashes and Their Recovery
Want to know how deep it can really go? In our article Understanding Drawdowns: What Crash Years Reveal we analyze the 10 worst drawdowns in 130 years of Dow Jones history — including recovery times (spoiler: 1929 took 25 years).
Conclusion
Rising return and falling drawdown are not a contradiction — they measure two different things. Return says: "this is how much you earned." Drawdown says: "this is how far you were in the red at some point." Both together give you the complete picture.
On seasonalpha.ai you can compare return and drawdown for over 500 assets — with 130 years of history for the Dow Jones.
Frequently Asked Questions
Can the drawdown become positive?
No. The drawdown is by definition zero (when the price is at a new high) or negative. A positive drawdown does not exist — that would simply be a new high.
Why does the avg drawdown keep falling over the course of the year?
Because the average is formed across many years. In each individual year there are recoveries. But different years have their troughs at different points in time. Averaged together, these loss phases overlap — and the average tends to fall.
Is a deep drawdown always bad?
Not necessarily. A deep drawdown with a fast recovery (like 2020: –37%, but 7 months to recovery) is better than a moderate drawdown without recovery. What matters is the combination of depth and duration.
How do I use drawdown and return together?
Compare both charts side by side — exactly as in this article. When return rises and the drawdown stays flat, that is a sign of a stable uptrend. When return stagnates and the drawdown deepens, it gets risky.