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 DJIA, -3.56% 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.
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.
1.32% or bust
The 10-year Treasury note yield TMUBMUSD10Y, +1.83% 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 TMUBMUSD30Y, +1.29% , 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 SPX, -3.35%, and the Nasdaq Composite Index COMP, -3.71% — each fell by at least 3% on the same day since Dec. 4, 2018, according to Dow Jones Market Data.
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. UNH, -7.84%, 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%).
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.
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:
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.