Bulletin
Investor Alert

New York Markets Open in:

Market Extra

Feb. 25, 2020, 10:04 a.m. EST

The Dow tumbled more than 1,000 points on Monday and marked its third-worst point drop in history — here’s how the stock market tends to perform after big drops

The coronavirus-inspired tumble, by the numbers

By Mark DeCambre, MarketWatch


AFP/Getty Images
A genuine tumble for investors?

It finally happened.

A bona fide selloff took hold Monday on Wall Street after investors spent weeks attempting to come to terms with the potential impact of the COVID-19 outbreak as it spreads in countries outside of China, notably Italy and Iran, threatening to dent global supply chains and economies.

There are now 79,339 cases of COVID-19 — the infectious disease derived from the novel strain of coronavirus that reportedly originated in Wuhan, China, last year — in 30 countries, and 2,619 deaths, according to the latest figures from the World Health Organization.

Third-biggest point drop...ever

The day’s decline marks the third-biggest daily point drop for the Dow Jones Industrial Average (DOW:DJIA) in its 124-year history. The blue-chip benchmark closed 1,031.61 points, or 3.56%, lower, to end at 27,961, not far from the intraday low at 27,912.44.

Date Point change % change
Feb. 5 -1,175 points -4.60%
Feb. 8 -1,032 -4.15
Feb. 24 (at low) -1,031.61 -3.56%

To be sure, such point drops are less meaningful because the Dow has been trading at lofty levels. For example, the Dow’s 1987 crash was a 508-point decline but that fall represented a 23% plunge back then.

Ryan Detrick, senior market strategist at LPL Financial, also points out that it was the 254th worst day for the Dow on a percentage basis (see attached tweet).

Need to Know: Warren Buffett says ‘don’t buy or sell’ on the headlines as coronavirus sends stocks plunging

1.32% or bust

The 10-year Treasury note yield (XTUP:BX:TMUBMUSD10Y) tumbled more than 10 basis points to trade at 1.367% on Monday, just shy of its June 2016 record low of 1.32%. Bond prices rise as yields fall. The 30-year bond yield (XTUP:BX:TMUBMUSD30Y) , known as the long bond, hit an all-time low last week, raising worries that bond investors are betting on economic pain ahead.

Government bonds have been hovering around lows even as stocks have been climbing, an odd dynamic in the market and has implied that investors are unsettled by the uncertainty surrounding the outbreak.

3% or worse

Monday’s selloff marks the first time all three major benchmarks — the Dow, the S&P 500 index (S&P:SPX) , and the Nasdaq Composite Index (AMERICAN:COMP) — each fell by at least 3% on the same day since Dec. 4, 2018, according to Dow Jones Market Data.

11 sectors

The 11 sectors of the S&P 500 index all finished in the red, led by a 4.74% decline in the energy sector (PSE:XLE) , which suffered the worst daily percentage loss since Aug. 24, 2015.

All 30

All 30 of the Dow Jones Industrial Average’s components finished lower, led by a whopping 7.8% decline in shares of UnitedHealth Group Inc . (NYS:UNH) , marking its largest daily slide since Aug. 8, 2011. The fall in the health insurer exacted a toll of more than 160 points on the price-weighted blue-chip benchmark.

Negative for the year

Monday’s downturn has wiped out this year’s gains for the Dow (now -2.02%) and the S&P 500 (now -0.15%).

50-day

The S&P 500 breached its 50-day moving average for the first time since October. Technical analysts view moving averages as dividing lines between long-term and short-term bullish and bearish averages. The S&P 500’s 50-day moving average stands at 3,275.90 (see chart below).

The Dow also closed well below its 50-day moving average at 28,805.54, and slightly above its 200-day moving average at 27,224.03.

Worth a read : Apple’s stock falls below its 50-day moving average for first time in nearly 6 months

Read: Economists say Fed rate cut could come as early as March

Check out: Can stocks keep soaring as the U.S. dollar surges? What investors need to know

So how does the market tend to perform in this aftermath?

Despite all the relative carnage being endured by the market, stocks have a tendency to rebound after a hit of at least 2%, Dow Jones Market Data shows.

The past 10 times that the S&P 500 index fell by as much as 3%, for example, it declined 0.27%, on average, in the next trading session. However, the average performance improved dramatically in the following week, month and year, as shown in the table below:

Time frame Performance S&P 500 after it has fallen at least 3% in one day
Day after -0.27%
1 week after 1.83%
1 month after 2.08%
1 year after 12.97%

Meanwhile, the Dow has a similar record.

Time frame Performance Dow after it has fallen at least 3% in one day
Day after -0.19%
1 week after 2.07%
1 month after 2.93%
1 year after 12.52%

To be sure, how the market performs in the past is no guarantee of what it will do in the future. On top of that, an epidemic that gets out of control could lead to unprecedented results for the market and economy. During past epidemics, the market has eventually rebounded, however.

The researchers at Bespoke Investment Group also make the case that, over the past 11 years, declines of more than 2% for the S&P 500 have tended to see healthy rebounds, particularly when that daily slide happens on a Monday.

“Since March 2009, there have been 18 prior 2%+ drops on Mondays, and SPY has seen an average gain of 1.02% on the next day (Turnaround Tuesday),” the analysts wrote Monday. See attached chart:


Source: Bespoke Investment Group

Read: Opinion: If the coronavirus isn’t contained, a severe global recession is almost certain

Coronavirus update: Nearly 80,000 cases, more than 2,622 deaths, clusters emerge in Iran and Italy, and Iran

—Michael Destefano contributed to this article

Link to MarketWatch's Slice.