Market Volatility is Sometimes Hyped
News headlines about stock market volatility often distort the importance of a stock market decline by emphasizing point changes in major indexes rather than percentage changes. When the Dow Jones Industrial Average falls by more than 200 points news commentators often describe the event as being dramatic. But a clear view of equity market volatility must take into account the high level of the Dow. A better measure of market volatility is based on percentage changes. The following table shows that the Dow was at much lower price levels over the last 100+ years:
|Before 1935||Mostly below 100|
|Before 1980||Mostly below 1,000|
|Before 1999||Mostly below 10,000|
At levels above 15,000, we should expect that Dow Jones Industrial Average to lose more than 200 points in a single day at least once per month on average. When the Dow fell 500 points on a single day in October 1987 it was an historic event. A similar change in the Dow today would require a 3,500 point decline. Thinking about market changes in percentage terms rather than points can help investors maintain a more clear view of the historical context of market volatility.