The Dow just posted a mighty big drop in a single day. Here’s what usually happens next…

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Traders work on the floor of the New York Stock Exchange (NYSE) in New York City.

Spencer Platt | Getty Images

The Dow just cratered more than 760 points, or 2.9%, in a single day. But if recent history is any guide, the pain should be short lived.

Unless this trade war is introducing a new risk to the market that we haven’t seen during the last 10 years.

Markets had their worst day of the year on Monday as a full blown trade war between the U.S. and China solidified investors worst fears about a global slowdown. President Donald Trump’s additional tariffs slapped on Chinese goods caused China to retaliate by letting its currency weaken, crossing the 7 yuan per dollar threshold, and reneging on a promise to resume imports of U.S. agricultural products.

CNBC used Kensho, a hedge fund analytics tool, to track what happened to the market after the Dow dropped at least 2.5% in a single trading day during this bull market. The data showed that this large of a drop has happened 30 times since 2009 and markets have almost always recovered from a sell-off of this magnitude.

The day following the market sell-off is often encouraging, with the average Dow return being a positive 0.27%. Five days later the average return is 2.3%.

One-month after the market sell-off, the average return is 4% if you bought on the day the market tanked.

The last time the Dow plummeted 2.5% was on January 3 amid the intensified U.S.-China trade war following a rate increase from the Federal Reserve. The stock market went on to have its best January surge in 30 years as the Fed pivoted to a more dovish stance and trade fears eased.

“Buy the dip” has been the mantra for this bull market and the data backs that up… unless this time is different.



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