Executive Edge

Since 1990, this is how Dow, S&P perform in quarters that follow their worst drops

Key Points
  • Across 11 periods since 1990 after the S&P 500 declined by 10% or more in a quarter, the stock market index posted an average return of 7% in the next quarter.
  • The first quarter 2020 decline was 20%; the drop was 23% in the Dow Jones Industrial Average.
  • The coronavirus is a crisis unlike any recent past market crash, including the 2008 financial crisis, 9/11 and the dot-com bubble.
The upside to the Dow's worst performance since 1987

The second quarter has not gotten off to a convincing start for investors looking to call a bottom and get back to stock market profits. The Dow Jones Industrial Average tanked on Wednesday, and a doubling in jobless claims to more than 6 million, while not unexpected, does not add confidence to hopes that the economy and market can quickly rebound. However, recent market history of big quarterly declines does show that after quarters in which the S&P 500 declined by 10% or more, the next quarterly move was most often back up.

In the first quarter, the Dow Jones Industrial Average turned in its worst performance since 1987, falling more than 23%. The S&P 500 had its worst quarter since 2008, with a decline of 20%. Both major stock market indices saw four-quarter winning streaks end.  

Long-term market history dating all the way back to 1933 shows that the Dow tends to pare massive first-quarter losses during the remainder of a full year but still tends to finish the year in the red. More recent market history suggests that stocks may not only be able to claw their way back to near even but bounce back with near-term gains following their worst three-month periods, according to a CNBC analysis of Kensho market trading data since 1990.

Since 1990, after quarters in which the S&P 500 declined by 10% or more, it has produced an average return near-7% in the following quarter, while the Dow has posted a 6% return, according to Kensho. Both traded positive across nine of those 11 historical trading scenarios. Since 1990, in the 12-month periods after a decline of 10% or more in the S&P, both it and the Dow have posted positive results in all periods except after the combination of 9/11 and the dot-com bubble.

Trading in the Dow Thursday recovered after Wednesday's 800-point drop. WTI crude jumped after President Donald Trump said he expects Saudi Arabia and Russia to come to an agreement about their price war. Many in the market were skeptical a deal would be easy to reach that went far enough to change bearish dynamics in the oil market, though it could help stabilize oil prices, avoiding a further price collapse and being a net positive for the energy sector and economy. WTI crude experienced its biggest one-day jump ever, but it had lost 59% this year. The stock market remains volatile, and investor attempts to call a bottom have been met with more days of selling, like Wednesday. Some heavyweight investors, like Jeff Gundlach, still expect another big leg down in stocks before the selling ends.

A few notable exceptions in the Kensho data:

After the only other quarterly drop since 1990 of 20% or more, similar to this year's plummet, stocks did not bounce back in the next quarter. After the 22% drop in the S&P in Q4 2008, the S&P 500 and Dow both continued down, with double-digit percentage declines, in the next quarter.

Since 1990, After S&P 500 quarterly drop of 10% or more

Period S&P 500 % return S&P % return next quarter Dow % return next quarter
Q4 2018(-13.97)13.0711.15
Q3 2011(-14.33)11.1511.95
Q2 2010(-11.86)10.7210.37
Q1 2009(-11.67)15.2211.01
Q4 2008(-22.56)(-11.67)(-13.30)
Q3 2002(-17.63)7.929.87
Q2 2002(-13.73)(-17.63)(-17.87)
Q3 2001(-14.98)11.5413.27
Q1 2001(-12.11)5.526.31
Q3 1998(-10.30)20.8717.07
Q3 1990(-14.52)7.97.39

Source: Kensho

And even though former Federal Reserve Chair Ben Bernanke recently referred to the current crisis as being more like a "major snowstorm" rather than another Great Depression, the "snowstorm" did occur after more than a decade-long bull market and after indicators such as the inverted yield curve had implied the market was due for a recession.

In the periods dating back to 1990, the one that encompassed both 9/11 (an exogenous shock to the market most similar to the coronavirus ) and the dot-com bubble bursting included another counter-indicator to the trend of short-term bounces in stocks. 

Bank of America's global research group became more dour in its recession outlook on Thursday, writing, "The recession appears to be deeper and more prolonged than we were led to believe just 14 days ago when we last updated our forecasts, not just in the US but globally as well. We now believe that there will be three consecutive quarters of GDP contraction with the US economy shrinking 7% in 1Q, 30% in 2Q and 1% in 3Q. We expect this to be followed by a pop in growth in 4Q. We forecast the cumulative decline in GDP to be 10.4% and this will be the deepest recession on record, nearly five times more severe than the post-war average."

A Wall Street Journal report from earlier this week showed that it's easy to find a screen showing time is of the essence in jumping back into stocks: Putting $100,000 into an S&P 500 index fund on the day the bull market that began on March 9, 2009, and sold at last month's peak, it would have resulted in a gain of $630,000. Waiting just three months to gain back confidence in stocks and get back in on that bull market would have brought the gain down to $450,000.

But some financial advisors caution that any attempt to time the market perfectly is probably a mistake, and even a detailed look back at dead-cat bounces and how markets respond after big drops should eventually circle back around to one conclusion:

"Memories shape how market participants think, react, and feel about the markets. So there's no way of telling what will happen next even when we use scenario analysis to guide our actions. What I do know is the history of stock market performance shows that the longer you extend your time horizon, the higher the probability you have of seeing gains. This relationship seems to hold following a big down quarter in stocks, as well," wrote Ritholtz Wealth Management financial advisor Ben Carlson on his Wealth of Common Sense blog, after the big drop of December 2018.

The Kensho data does show that since 1990, it was only the 2001–2002 period, which included both 9/11 and the dot-com crash, during which both the S&P 500 and Dow were lower one year later. Both indexes posted average one-year gains above 18% in the annual periods after a quarterly decline of 10% or more in the S&P 500.