It finally happened.
A bona fide selloff took hold on Wall Street Monday after investors spent weeks attempting to come to terms with the potential impact of COVID-19 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 second-biggest daily point drop for the Dow Jones Industrial Average DJIA, -3.56% in its 124-year history. The blue-chip benchmark closed 1,031.33 points, or 3.56%, lower, to end at 27,961, not far from the intraday low at 27,912.44.
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% decline back then.
…So how does the market tend to perform in this aftermath
Despite all the relative carnage being endured by the stock market presently, stocks have a tendency to rebound after a hit of at least 2%, the Dow Jones Market Data shows.
The last 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 improves dramatically in the following week, month and year, as shown in the table below:
one week: 1.83%
one month: 208%
one year: 12.97%
Meanwhile, the Dow has a similar record.
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 the 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 declines for the S&P 500 of more than 2% over the past 11 years also have tended to see healthy rebounds, particularly when that daily slide happens on Monday.
SO…. relax. By the time you jerk that knee, the market will be moving back up. Don’t get trapped by ‘hindsight’ or ‘recency’ bias. This exact thing is WHY we’re properly diversified; it’s why the allocation of a portfolio matters.
If you’re still experiencing jitters, I’d recommend a shot of your favorite elixir. We’ll provide the shot of optimism to go with it.