Executive Edge

Since 1990, here's how Dow, S&P 500 trade in the year after their worst, sudden crashes

Key Points
  • The Dow had its best day since 1933 on Tuesday.
  • Boeing had its best day in decades on Wednesday.
  • Market history shows stocks follow their worst drops with big bounces.
  • It also shows investors don't have to call a bottom perfectly to get back in on gains.
Here's what market history says about chances the Dow surge lasts

The coronavirus has created unprecedented problems for the economy and stocks, but in one way, it's suddenly acting just like previous massive sell-offs: The selling has been followed by a big bounce. After the worst five-day run for stocks since 2008, stocks surged, with the Dow Jones Industrial Average having its best day since 1933 on Tuesday. In less than 48 hours, the Dow rose 13%, posting its first back-to-back gains since February.

The financial stimulus package from the federal government that was passed by the Senate on Wednesday night, and the actions taken by the Federal Reserve to pour money into the banking system and markets, have restored some investor confidence. But recent history of the Dow and S&P 500 shows that big rebounds should not be a surprise. In each of the past worst five-day periods for stocks, the market went on a tear in the following week, 100% of the time, with the type of big gains we've seen in the past few days, according to a CNBC analysis of data from Kensho. 

Big days for the Dow, on their own, have a mixed track record over the past two decades. Since 2002, the blue-chip stock index has traded positive 50% of the time in one-week periods after it had a single-day gain of 5%, according to Kensho. Futures trading before the market open on Thursday indicated that stocks might take a breather. 

Stocks opened higher on Thursday morning after back-and-forth futures trading and a record jobless claims number over 3 million that was double the expectation and blew past the Financial Crisis peak.

What does market history say comes next?

After Monday's selling wiped out all stock market gains since the day after Donald Trump's election as president, has a market bottom been reached?

Kensho data shows that after these five-day periods of extreme stock selling, the major equity benchmarks tend to produce positive results over three-, six- and 12-month periods.

The S&P 500 has been positive 100% of the time in the one-month period after major sell-offs dating back to 1998. That includes the Russian default and Asian debt crisis of 1998, 9/11, the dot-com bust, the Lehman bankruptcy, the Taper Tantrum and the Chinese market panic of August 2015. Here are the average returns for the S&P 500 after the five-day sell-offs across these six historical periods:

  • One-month: 7.74% gain
  • Three-month: 10.68% gain
  • Six-month: 6.61% gain
  • 12-month: 17.93% gain

Calling a market bottom

Some big investors have been buying back in, such as hedge fund billionaire Bill Ackman. 

CNBC contributor and financial advisor Josh Brown wrote on his Reformed Broker blog that calling a bottom in a crash caused by a public health crisis is premature: "What Congress and the Fed have done is fine. But the underlying problem has not been fixed. I don't see any meaningful bottom for stocks until we get some wins against the virus."

After the Dow's best day since 1933, Jonathan Golub, chief U.S. market strategist at Credit Suisse, agreed, saying, "The truth is, the market is going to bottom when the number of cases starts to peak. Between now and then, you're left with volatility."

Hedge fund manager Paul Tudor Jones said on CNBC Thursday morning he thinks the market could be higher as soon as three months from now despite expectations for a turbulent April. "I do think the stock market's going to find a bottom once we get a peak in the epidemic curve, [there's] not a doubt in my mind the stock market will rally," he said.

Spencer Platt | Getty Images

Other market technicians are more optimistic that early signs indicate the fight against the coronavirus has turned more positive. The economy could restart in a "number of weeks," according to J.P. Morgan's global head of quantitative and derivatives strategy Marko Kolanovic. He wrote to clients this week that the S&P 500 could be back to record levels by early next year if current progress on social distancing holds and the pandemic pattern across the U.S. holds.

For investors who missed the past two-day surge in the Dow, the Kensho analysis and other historical market data shows that there is not a need to rush to call a bottom to get in on sizable market gains. An analysis published this week by DataTrek Research using the Financial Crisis shows that buying the S&P 500 one to three months after the March 2009 lows still produced big gains.

A month after the March 2009 low, the S&P 500 was up 26.6%. An investor who waited and bought two months after that low was still up 20% at year-end; investors who bought three-months after the low were up 18.4% at year-end.

"Bottom line: Don't worry about buying the absolute bottom of any market rout, because there will be plenty of performance available once it happens convincingly," wrote Nicholas Colas, co-founder of DataTrek Research in a report published on Monday.