200-Point Moves in the Dow Are No Longer Significant
Thursday, March 26, 2015

A quick question: Is a 200-point move in the Dow Jones industrial average a big change or not?

If you are like many people, your intuition is to say “yes, it is” (especially if you ignored the headline of this week’s commentary). Until fairly recently, a 200-point change was a big move. But, then the bull kept running. And running. With each upward move, the absolute value of the Dow rose. As the Dow rose, the importance of a 200-point change decreased.

A little bit of math will put the discussion into perspective. On August 15, 2011, the Dow gained 213.88 points to close at 11,482.9. This was a 1.9% jump. A couple of months ago, on January 7, 2015, the Dow gained 212.88 points to close at 17,584.52. Though it was almost exactly the same size move, point-wise, the blue-chip average’s percentage gain was just 1.2% on January 7, 2015. The difference was the percentage size of both moves, with the 213-point move last January being proportionally smaller. This is due to the fact that the Dow rose by about 6,000 points over the approximate four-year span between the two days.

We humans tend to focus on the point move of the Dow. This is what is often reported to us, through headlines such as “the Dow rose X points today” or the “Dow was off X points today.” As such, we have learned to frame our expectations of what is or is not a volatile day based on the point move in the blue-chip average.

The problem with such thinking is that it focuses our attention on the absolute change and not the percentage change. This, in turn, makes it easy to have an inaccurate perception of what a significant (or even notable) price change is. In the case of the Dow, a daily swing of 200 points was significant when the blue-chip average was trading near or below 10,000. Such a move represented a change in value of 2% or greater. Now, with the Dow trading near 18,000, it’s not significant. A 200-point move represents a change of just 1.1%, which is within the range of normal daily fluctuations.

None of this is to say that 2015 has been calm. This year is shaping up to be the most volatile one since 2011. As you may remember, notable swings occurred in 2011 as the U.S. markets underwent a correction in part due to the European sovereign debt crisis. To date, the Dow has closed up or down 1.5% or more nine times this year, or once every four days. In 2011, the blue-chip average closed up or down 1.5% or more 52 times, or once every 6.3 days. The sample size for 2015 is still small, so this is not an apples-to-apples comparison, but it does lend confirmation to any feeling you have about volatility being higher now than it has been over the past few years. Be sure to take note of how volatility is being measured: by percentage and not point moves.

Just as you should focus on the percentage move when looking at the market, so should you focus when looking at the prices of securities and funds. A $10 change in the price of AutoZone (AZO) or Chipotle Mexican Grill (CMG) is fairly meaningless given their $650+ share prices. In contrast, a $10 price move would be very significant for Ford Motor Company (F) or Alcoa (A) since both stocks trade at below $20 per share.

Finally, keep in mind that price volatility is a much smaller risk than how you react to it. Investors who keep calm and stick to their long-term, disciplined strategies in the face of high price volatility are more successful than those who give in to the emotional desire to react to it.

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The Week Ahead

Just three members of the S&P 500 will report earnings next week: Monsanto Company (MON) on Wednesday and both Micron Technology (MU) and CarMax (KMX) on Thursday.

Although the earnings calendar is light, the economic calendar is packed. Monday will feature February personal income and spending and February pending home sales. The January Case-Shiller home price index, the March Chicago PMI and the Conference Board’s March consumer confidence survey will be released on Tuesday. Wednesday will feature the March ISM manufacturing index, the March ADP employment report, the March PMI manufacturing index and February construction spending. February international trade and February factory orders will be released on Thursday. Friday will feature March jobs data, including the unemployment rate and the change in nonfarm payrolls.

Several Federal Reserve officials will make public appearances: Vice Chair Stanley Fischer on Monday; Cleveland president Loretta Mester and Richmond president Jeffrey Lacker on Tuesday; San Francisco president John Williams and Atlanta president Dennis Lockhart on Wednesday; Chair Janet Yellen on Thursday; and Minneapolis president Narayana Kocherlakota and St. Louis president James Bullard on Friday.

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AAII Sentiment Survey

Optimism about the short-term direction of stock prices rebounded, but remains below its historical average in the latest AAII Sentiment Survey. Both neutral sentiment and bearish sentiment pulled back from last week’s readings.

Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded by 11.3 percentage points to 38.4%. Even with this week’s sizeable increase, optimism is below its historical average of 39.0% for the third consecutive week.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, pulled back by 4.2 percentage points to 37.2%. Even with the decline, neutral sentiment remains above its historical average of 30.5% for the 12th consecutive week. This is the longest such streak since a 32-week stretch of above-average readings between January 9 and August 14, 2014.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 7.1 percentage points to 24.4%. The drop puts pessimism back below its historical average of 30.5% for the 42nd time out of the past 52 weeks.

Optimism rebounded back to near its historical average after falling to an unusually low level last week. Some individual investors reacted favorably to the Federal Open Market Committee’s decision to remove the “patient” language, as the responses to this week’s special question reveal. Differences in specific AAII members who participated in this week’s survey versus last week’s may have also impacted the shift in sentiment readings.

The recent price fluctuations, prevailing valuations, disappointing earnings or guidance from certain companies, geopolitical events, the pace of economic growth and worries that an even larger decline in stock prices could occur are weighing on some AAII members’ short-term market outlook. Keeping other AAII members encouraged is the ongoing bull market, sustained economic expansion, earnings growth and still-accommodative monetary policy.

This week’s special question asked AAII members what they thought about the Federal Open Market Committee removing the “patient” language from its recent meeting statement. Responses were very mixed. The largest group of respondents, 25%, agreed with or otherwise approved of the message. Several thought the Fed was purposely trying to avoid surprising market participants or was being conscious of the impact that an unexpected change in monetary policy would have on the markets. Slightly less than 24% of all respondents said the change in wording was not significant. About 10% disapproved of the meeting statement and/or current monetary policy. Roughly 9% thought interest rates should be raised. An additional 9% said a rate hike is forthcoming, while 6% said they were expecting the wording change in last week’s meeting statement.

Here is a sampling of the responses:

  • “All of this parsing of words tells me that [the Fed] is doing a good job and not trying to stampede the crowd in either direction.”
  • “I think it is about time that they raise interest rates. The economy has been doing well enough to have interest rates raised.”
  • “Big mistake. The so-called recovery is very fragile.”
  • “Gobbledygook. Fedspeak is right up there with doublespeak.”
  • “Simply one step closer to raising the interest rate.”

This week’s AAII Sentiment Survey results:

  • Bullish: 38.4%, up 11.3 percentage points
  • Neutral: 37.2%, down 4.2 percentage points
  • Bearish: 24.4%, down 7.1 percentage points

Historical averages:

  • Bullish: 39.0%
  • Neutral: 30.5%
  • Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at: http://www.aaii.com/sentimentsurvey.



This week’s Sentiment Survey results:

Bullish: 38.4%, up 11.3 points
Neutral: 37.2%, down 4.2 points
Bearish: 24.4%, down 7.1 points

Historical averages:

Bullish: 39.0%
Neutral: 30.5%
Bearish: 30.5%
Take the Sentiment Survey.

Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!