A Quarter of Superlatives

By Nicholas Jasinski |  Tuesday, March 31

Worst First. Stocks fell today to close out a first quarter for the history books. The still-growing coronavirus pandemic's negative impact on people’s health and the economy became very real, very fast in the span of just weeks, sending the market tumbling.

The Dow Jones Industrial Average fell 23.2% in the three months to start 2020. For some historical perspective, that's the worst first quarter ever in the Dow’s 135-year existence, and its greatest loss in any quarter since the fourth quarter of 1987—which included the historic Black Monday crash. It's the sixth-worst quarter ever for the Dow, after 1987's fourth quarter and four other quarters that fell during the Great Depression. Quite the company.

Evie Liu noted one potential silver lining in that steep first-quarter drop, however: The market has a historical tendency to revert to the mean. "A bad quarter is usually followed by some solid gains," Evie wrote at barrons.com today. "The [Dow] rose by an average of 5.4% in the three months following its 10 worst quarters. It was an average of 10.5% higher a year later."

This has certainly been a unique drop for the market, given its cause. The coronavirus pandemic is unlike anything investors have faced in modern times. The economy isn’t falling into a recession because of a financial crisis or a disruption to a key commodity or energy source. Instead, social-distancing measures are slamming the breaks on economic activity, as people stay home and businesses are required to close.

The transition from healthy economic scenarios to grim forecasts and record drops in output has never come so fast. At the same time, there's reason to believe the reversion to the mean after this crisis will be faster than usual as well. If trillions of dollars of fiscal stimulus and rock-bottom interest rates can help the economy restart quickly from that deep freeze, the rebound might be stronger and the stock market could recover even faster over the coming year.

The S&P 500 fell 1.6% today to close the quarter off 20%. The Nasdaq Composite lost 1%, to finish down 14.2% year-to-date. The Dow fell 1.8% today.

In other news, a stimulus bill 4.0 is already the talk of Washington. President Donald Trump floated the idea of a $2 trillion infrastructure-focused package. Relief for state governments and hard-hit companies in the travel industry are also reportedly under discussion.

And Xerox Holdings officially dropped its pursuit of its larger printer and copier rival HP this afternoon. HP had twice rejected Xerox's cash-and-stock offers, and questioned the cost savings that Xerox’s board claimed the combination would produce. HP announced its own plan to repurchase $15 billion of its shares instead.

But in the end, it was the deal’s structure that caused it to fail, not HP’s opposition. Xerox needed to take on up to $24 billion in additional debt to make it happen. And with the economy headed into recession and markets still in turmoil, it doesn’t seem like the best time to be levering up.