According to the original plan, today’s topic should have been about zero-cost airdrops. But I believe this article might be even more valuable to you right now.
Last Wednesday, January 8, a fresh market analysis report from Goldman Sachs took the investment world by storm. Their latest model showed that the probability of a significant market drawdown was quietly approaching 30%.
However, they added in the report that this wasn’t yet a “full-blown alarm” moment—30% isn’t 100%. Historically, the most severe market downturns tend to occur when this probability surpasses 35%. This makes the current situation both risky and delicate: warning signals are flashing, but a catastrophic plunge may not arrive just yet. Unsurprisingly, this report became the subject of intense discussion, dominating financial conversations in the short term.
Now, here’s the big question for you: should you sell everything immediately or just wait and see? I’ll explain this in detail later. But first, let’s dig deeper into this indicator. How severe could the potential drawdown be? When might it occur? And most importantly, how critical is this indicator?
1. Why Should You Care About Goldman Sachs’ Drawdown Probability?
Goldman Sachs (GS) has long established itself as a heavyweight in the world of finance. Over the years, they’ve accumulated extensive experience in macroeconomic strategy, often influencing institutional investors' capital flows at critical moments. While each forecast may not be definitive, GS’s drawdown probability acts like a market weathervane, swaying investor sentiment. In the industry, people often say, “When Goldman hints at a market shift, fund managers worldwide start reevaluating their portfolios.”
Remember the global financial crisis of 2007?
While many Wall Street investment banks were still celebrating the booming real estate market, Goldman quietly began adjusting its investment strategies. Back then, mortgage defaults in America’s Midwest were creeping upward like a spreading cancer, affecting a growing number of financial derivatives. Confidence in subprime mortgage securities remained stable through the summer, but by autumn, the atmosphere had turned icy.
Although GS didn’t announce a specific “drawdown probability” at the time, they decisively reduced their exposure to mortgage-backed securities and bought ample hedging instruments in the derivatives market. When the storm eventually hit, many of their overly optimistic peers faced dire straits—even bankruptcy—while GS emerged relatively unscathed, having donned their financial “bulletproof vest” in time.
In recent years, Goldman has made several accurate calls at major market turning points, further solidifying trust in their analysis. Let’s look at some of their recent successful predictions:
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May 2024 China Stock Market Correction: GS analysts noted in May 2024 that despite a recent rally, Chinese stocks tend to see a 5%+ pullback after rising over 20%. Soon after, the A-share market experienced just such a correction, validating their forecast.
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Summer 2024 U.S. Stock Correction: In June 2024, GS Managing Director Scott Rubner warned that August is typically a weak month for U.S. stocks and advised reducing exposure before July 4. Indeed, U.S. stocks corrected in August, proving their analysis correct.
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August 2024 U.S. Stock Rebound Prediction: After correctly predicting the August pullback, Rubner suggested in mid-August that a technical rebound was likely by month-end. The market rebounded as expected, aligning with his forecast.
With such a track record, it’s no wonder that when GS issues a “drawdown signal,” traders take it seriously and reassess their strategies to avoid being caught off guard.
Even more noteworthy, this report focuses on the stock market. Yet in today’s interconnected global economy, when the stock market catches even a slight chill, other sectors—crypto, precious metals, raw materials—rarely escape unscathed. That’s why I’m discussing drawdown probability with you now.
2. What Is Drawdown Probability, and How Is It Calculated?
“Drawdown Probability” refers to the likelihood of a significant price or index drop over a given period. Let’s start with the basics: what is a drawdown?
A drawdown is simply the decline in price from a peak to a trough within a certain timeframe, as shown in the chart below.
Now, what’s drawdown probability? It’s the chance that such a drop will occur.
One key concept you need to understand here is “unconditional probability.”
2.1 What Is Unconditional Probability?
In GS’s research framework, unconditional probability refers to the average likelihood of a significant drawdown (typically a drop of 10% or more) occurring, without accounting for current macroeconomic or market-specific factors. Historical data on U.S. stocks show that this unconditional probability hovers around 20%. Depending on the research period and definition, it may range between 15% and 25%.
In other words, based purely on historical patterns, ignoring factors like inflation, geopolitics, or monetary policy, the average annual chance of a 10%+ drawdown is around 20%. This is what’s called the unconditional probability.
2.2 What’s the Link Between Drawdown Probability and Depth?
The “nearly 30%” probability GS cited suggests that, given current macroeconomic conditions and market sentiment, the likelihood of a significant drawdown is higher than this historical average.
As for the extent of the potential drawdown, GS sticks to the industry-standard definition: a 10%+ drop from a recent peak. They also noted that once the probability crosses the 35% threshold, history often correlates this with deeper drops, sometimes as steep as 15% or even 20%+.
In short, the higher the drawdown probability, the steeper the potential drop.
2.3 How Is Drawdown Probability Calculated?
At GS, calculating drawdown probability is like staging a well-orchestrated play.
Their research team pores over historical data, comparing key indicators like inflation, interest rates, and corporate earnings to identify patterns that led to major drawdowns.
They also monitor current economic metrics, such as employment levels and supply-demand structures, to assess the market’s foundation.
Additionally, sentiment indicators—hedge fund short positions, options trading volumes, and even social media buzz—are analyzed to gauge shifts in risk appetite.
Finally, GS uses quantitative models and machine learning to integrate all these clues into a comprehensive picture, which produces a specific drawdown probability. If risk spikes, they advise clients to hedge or diversify; if risk remains manageable, they maintain or tweak their bullish stance.
Though not always 100% accurate, GS’s forecasts have been reliable enough to make them a trusted reference point for many investors.
2.4 Where to Access Drawdown Probability?
You might be wondering: where can I access such an important indicator in a timely manner?
Goldman Sachs’ drawdown probability isn’t readily available to the public, like a weather forecast. Instead, it’s typically shared as part of research reports or internal briefings, distributed first to GS’s institutional clients and paid subscribers. In other words, if you’re a core GS client or have research collaborations with them, you can access these forecasts through private channels, such as dedicated client portals, internal emails, or exclusive meetings.
For retail investors, the most common way to learn about it is through references or interpretations in financial media or research notes from brokerage firms. Outlets like Bloomberg Terminal, Reuters, or The Wall Street Journal often provide brief mentions of GS’s drawdown probability. Some investment news websites also promptly compile and summarize GS’s latest research views, releasing key takeaways to the public. To access GS’s complete reports, you’d need to subscribe to their research services or use advanced financial data terminals with premium access.
Clearly, I don’t have such subscriptions either. I first came across this information in an article from The Block.
Here’s what they said about the drawdown probability, in just two sentences:
Goldman Sachs issued a note Wednesday morning indicating an increased probability of an equity market drawdown, rising to nearly 30%. While this is above the unconditional probability, it remains below previous peaks, with the most severe outcomes historically occurring after the probability crosses 35%.
Goldman Sachs released this report on Wednesday morning, stating that the likelihood of a market downturn had increased to nearly 30%. While this exceeds the unconditional probability, it’s still below past peaks, with the most severe outcomes historically occurring when the probability surpasses 35%.
Interestingly, this article was published on January 8, almost simultaneously with GS’s drawdown probability release. Very timely! I’ll likely check this website more frequently in the future.
Now, here’s the part you’ve been waiting for: as a crypto investor, how should you respond to the drawdown probability? Should you liquidate everything and exit the market immediately, hold your position, or hedge? Let’s explore.
3. How Should Crypto Investors Respond to Drawdown Probability?
As a crypto investor, you need to understand that drawdowns in the crypto market can be far more extreme than in the stock market. Even Bitcoin has experienced multiple 50%+ corrections. Therefore, it’s essential to take GS’s drawdown probability seriously. Here are a few suggestions:
3.1 Separate “Idle Money” from Daily Necessities
Newcomers often get excited about crypto’s potential and throw all their savings into it. But life’s expenses—rent, utilities, car payments—don’t stop for market downturns. That’s why only “idle money” should go into crypto, allowing you to ride out dips without jeopardizing your daily needs.
3.2 Avoid “All-In” Bets, Enter Gradually
Once you’ve determined your idle money, don’t go all-in at once. Crypto markets are highly volatile. If you buy at the peak, a pullback could leave you reeling. By entering gradually, you can spread your costs over time, better navigate fluctuations, and maintain flexibility to average down or take profits.
3.3 Steer Clear of High Leverage and Complex Strategies
High leverage can amplify gains but also magnify losses. Without a solid grasp of leverage, you risk catastrophic losses. Start with simple, lower-risk investments. Complex derivatives can wait until you’re more experienced.
3.4 Focus on Major Cryptos, Approach Small Projects Cautiously
Stick to large-cap cryptos like Bitcoin and Ethereum when starting out. They’re more stable and resilient. Avoid the allure of “100x moonshots” or obscure projects until you’ve gained enough knowledge and experience.
Conclusion
While we can’t predict exactly when the next storm will hit, GS’s drawdown probability offers valuable insight to help fortify your investment strategy.
Remember, drawdowns are part of the market’s natural cycle, not its end. Only those who prepare carefully and think long-term will emerge stronger when the dust settles. For crypto investors, the stakes are even higher.
Market turbulence can’t be avoided, but with proper planning—diversifying risks, avoiding leverage traps, and focusing on long-term value—you can weather the storm. These simple but practical steps are more reliable than any “surefire prophecy.”
Ultimately, the key to success lies in grounded, thoughtful, and adaptive investment wisdom.
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