Volatility, and Not Seeing the Forest for the Trees

The return of downside volatility has exposed problems with perception and with certain exchange-traded products.

On Tuesday, the front page of the Chicago Sun-Times declared, “Dow’s Historic Drop: 1,175-point plunge—its biggest one-day loss in history—puts the once-roaring 2018 market in the red.” The headline correctly reported how much the blue-chip average fell, but it failed to provide any context.

Monday’s drop put the Dow Jones industrial average and the S&P 500 index about where they were in early December. Was that mentioned in any of the headlines you saw? I’m guessing not. How about today? The large-cap indexes are about where they were on Thanksgiving. Yes, we’ve given up two months of gains, but it’s normal to incur downward price volatility.

You’re likely not hearing this message because point moves are bigger attention grabbers. Monday’s 1,175-point drop was huge on an absolute basis, but not nearly so on a percentage basis. The Dow’s 4.6% loss, while sizeable, didn’t even crack the top 20 in terms of the largest daily percentage declines. During October 2008—in the midst of the financial crisis—the blue-chip average experienced three daily declines of greater than 7%. None of these were records either. The biggest daily drop on a percentage basis remains October 19, 1987 (aka “Black Monday”), when the Dow shed 22.6% of its value.

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• Stock Market Retreats and Recoveries – Not only is downside volatility normal, but those who bought stocks on every 7% drop would have looked like terrific market timers.
• A Lifetime Investment Strategy – This timeless guide by AAII founder James Cloonan is worth reading anytime you feel nervous about the market.

• The Individual Investor’s Guide to the Top Mutual Funds 2018 – Our annual mutual fund guide is fully updated. The online version of this guide has information on nearly 1,600 funds.
• Retirement Doesn’t Negatively Impact Health – Two new studies found that retirees have fewer negative health shocks than they expected and experience a decrease in hospitalization rates relative to preretirement.

1. The Individual Investor’s Guide to the Top Mutual Funds 2018
2. Analyzing Your Financial Health Using Personal Financial Ratios
3. Reassessing Your Risk Tolerance? Don’t Overlook Estate Planning

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