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The thoughts and theories of a guy who basically should have gone to bed hours ago.

I know, I know - what's the point? But look at it this way - I stayed up late writing it, but you're reading it...

Let's call ourselves even & move on, OK?


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Thursday, April 03, 2008

The New, Volatile Stock Markets


If you follow the financial press, or watch a financial news network like CNBC, you've heard a great deal lately about how volatile the stock market has been lately. Every day, it seems, the Dow Jones Industrial Average seems to either jump more than a hundred points, or dip more than a hundred points. People who, well, let's just say, people of a certain generation have been waxing philosophic about how a hundred point move on the Dow was unheard of in their day, and now it happens all the time.

This got me thinking: are we just enamored of large numbers? The DJIA is, after all, an average, so the number of points it moves on any given day isn't as important as the percentage change that move represents. And, when the Dow was 6,000 (late-1996), a 1% move only represented a 60 point shift. Today, with the Dow over 12,000, the same 1% move represents 120 points. Perhaps there were lots of 60 point shifts twelve years ago but no one remembers those as clearly as the triple digit shifts they see today?

Here's a telling graph:


The above trend lines represent the average daily shift in each of the three major indexes for each month over the last ten years. In January, 2008, for example, the average daily move for the Dow (up or down) was 1.27%. In the same month, the S&P500 moved an average of 1.31% each day, and the NASDAQ moved an average of 1.40%. As you can see by the trend lines, these numbers are higher than they've been for around five years, so there is some justification for all the bellyaching of recent months.

That said, it's not nearly as bad as it was back in 2000-2003, particularly on the NASDAQ, where average daily shifts regularly topped 2%, sometimes even 3% or 4%.

This graph might be clearer:


It's the same data, but the daily averages are grouped by year, rather than by month. Here, we see that averaging together all of 2008 so far (January through March), this year is indeed more volatile for the Dow and S&P500 than any year in the last 10, except for 2002. For the NASDAQ, though, it still pales in comparison to 2000-2002, and is even slightly more stable than 1999. Comparing the two graphs, we see that 2000-2003 had some high (>2%) months and low months, so while the peaks were worse than what we're seeing now, the year-long averages balanced out. This is telling as we remember that 2008 still has 9 months to go, so the overall annual average might settle down quite a bit before it's done.

Bottom line: yes, the markets are volatile. But no, this isn't some calamitous event that we've never seen before and, in fact, in some cases it has been much worse. Also, my point from above still hold some water, I believe. Larger ordinal numbers create a bigger psychological impact than the changes of years past. Our memories are short enough as it is, and a constant stream of triple-digit changes help to cloud those memories even further.

At any rate, I hope you're all enjoying the (bumpy) ride...

posted by Brian at 6:13 PM


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