Driving home yesterday evening, this is what I heard on the radio…
Host leads with great emphasis in her voice, “The stock market was hammered today with The Dow Jones Industrial Average dropping over 326 points. Stocks fell sharply after a disappointing report on U.S. manufacturing and ahead of a busy week for economic indicators.”
Then in a more matter-of-fact, by-the-way-tone, she went on to say, “The S&P was down 40.7 and the Nasdaq was down 106.92.”
If following the stock market isn’t your thing, you might think holy cow, 326 points, that sounds really bad. It was not a great day for the stock markets, but markets will go up and down over time.
What bothers me is the way market moves are often reported in the news. Focusing on the number of points that an index went up or down misses the whole story. Unless you are tracking the markets, announcing point movement is rather useless info and does more to alarm than inform you.
On Monday:
- a 326 point drop took the Dow Jones Industrial Average from around 15,698.85 down to 15,372.80, a 2.1% decrease (326/15,698.85 = .0208)
- a 40.7 point drop in the S&P 500 Index took it from 1,782.59 to 1,741.89, a 2.28% decrease (40.7/1,782.59 = .0228)
- a 106.92 point drop in the Nasdaq Composite Index took it from 4,103.88 to 3,996.96, a 2.61% decrease (106.92/4,103.88 = .02605)
If we compare what was reported, the Nasdaq Index and the S&P 500 Index each decreased more than the Dow. So why did the S&P and the Nasdaq receive just a blip of coverage and the big story focused on the Dow’s 326 point drop? Is it because 326 sounds more significant and worthy of a headline compared to 40 or 106?
You may be saying, but Mary what’s the big deal, they all dropped? The issue is the emphasis placed on the “big number” without putting it in context.
This morning I talked with someone who was very nervous about the wide swings in the market. After we talked a while, I realized they were focusing on what they were hearing in the news. I asked them what would trouble them more right now, a 326 point drop in the Dow or the 106 point drop in the Nasdaq? “Well a 326 point drop of course.” was the answer I got. I was not trying to trick them, I just wanted to help show them that part of their fear may be due to focusing on the large number. I went on to explain that the Dow’s movement sounded more dramatic than the Nasdaq because the indices tracks at different levels, but the Nasdaq actually lost more on a percentage basis than the Dow in that one day move.
It can be useful to put this recent move in perspective by reviewing historical market drops:
- On October 28, 1929 the Dow Jones Industrial Average dropped by 38.33 points and the following day, October 29, 1929, it dropped by 30.57 points. If you are just focused on the point movement, that would not sound very alarming compared to yesterday’s move. But it was a 12.82% drop on the first day and an 11.73% drop on the second because the Dow was only tracking at around 299 at the beginning of October 28.
- On October 19, 1987, the Dow Jones Industrial Average dropped by 508 points. While the difference between a 326 and a 508 point drop doesn’t sound like a huge variance, the 508 point in 1987 was a drop of 22.61% because the Dow was only at the level of 2,247 before it started to fall.
- Monday’s drop of 306 points was only a 2% drop because the Dow was tracking at around 15,699 before the fall — about 52 times larger than the value of the Dow in 1929.
Again, while Monday was not a great day in the stock market, it was not as dramatic as the headlines may lead you to believe. Don’t let sound bytes create fear — or euphoria on the flip side when stock prices are rising. Make investment decisions by understanding the whole story.