What to Expect After the Huge Dow Drop

Stock traders shouldn't panic, if DJI history is any indicator

Feb 6, 2018 at 8:15 AM
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U.S. stocks were in a tailspin again yesterday, with the Dow Jones Industrial Average (DJI) dropping more than 1,000 points in its steepest one-day loss ever. What's more, it was the fourth massive drop for the Dow in six sessions -- something we haven't seen in two years -- and the first time since the financial crisis that the index gave up 1.5% or more in back-to-back sessions. Below, we take a look at what history can tell us about the short-term future for battered blue-chip stocks.

Dow After Huge Drops in Short Order

Monday was the fourth time in six sessions in which the Dow dropped more than 100 points. The last time that happened was in January 2016, according to Schaeffer's Senior Quantitative Analyst Rocky White.

However, in the grand scheme of things, these quick-and-dirty retreats aren't too extremely rare, with four occurring in 2015 alone. Since 1997, there have been 37 of these instances, but the DJI tends to bounce back in a big way afterwards, averaging bigger-than-usual returns one day, week, and month later.

Further, the index's average three-month return of 2.54% is bigger than usual, too, though things start to normalize six months out. Still, we might expect more volatility than usual going forward, if history repeats, as the Standard Deviation is higher than usual across the board following multiple steep drops in short order.

Dow falls triple digits 4 times in 6 days

Dow after triple-digit signals vs anytime since 1997

Stocks After Steep Two-Day Drops

This two-day sell-off has been worst ever, though, as far as points go. Specifically, the blue-chip barometer fell 1,842 points since Thursday's close, down 7.03%. The only other time the index gave up more than 1,000 points in a pair of sessions was in late August 2015, during which the Dow dropped 1,119 points, or 6.59%. However, after that stock market drop, the DJI went on to rally 12.3% over the subsequent three months. Here's hoping past is prologue.

dow falls 1K points in 2 days

The last time the DJI gave up more than 1.5% in two straight sessions within a month of touching a record high was back in July 2007, before the financial crisis. Prior to that, you'd have to go back to March 1997. In fact, since 1990, there have been just four of these instances, and only 13 in the Dow's history.

After these quick-and-dirty retreats, the DJI gave up 0.35%, on average, the following day, and was positive less than 50% of the time. After that, though, the index tended to outperform.

One month after, for instance, the Dow was up 1.38%, on average -- more than twice its average anytime one-month return of 0.63%, looking at the last 100 years' worth of data. Three months after, the index was up a bigger-than-usual 4.62%, on average, and six months after, the Dow was 11.02% higher, on average -- more than triple its average anytime return!

Dow after two straight drops of 1.5 percent

dow after two steep drops from record highs

 

 

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