A persistent comment/question I hear from clients and others relates to the market’s recent volatility….up 300…down 200…up 175…and so forth. You may remember that following the 2016 election and for much of 2017 there was very little volatility. During that time, I tried to remind people that volatility was not dead…that it would come back. And while 2018 may seem particularly volatile, history and the law of large numbers suggests that it is not.
To keep things in perspective, look to history. Jeremy Siegel, Professor of Finance at the Wharton School of the University of Pennsylvania, tells us that the average daily change in the stock market, going back 100 years, is two-thirds of one percent. A two-thirds of one percent movement per day is the average….some days are more than that and obviously some days are less….but the average is two-thirds of one percent per day – a statistic based on 100 years of market activity. Did I say that enough different ways? I hope so.
But now we need to think about the law of large numbers. A very small percentage of a small number is still a small number, but a very small percentage of a large number is a large number. Take a look at this table:
Level of
|
Year Dow reached
|
Average daily change
|
|---|---|---|
| 1,000 | 1982 | 7 |
| 5,000 | 1995 | 33 |
| 12,500 | 2007 | 83 |
| 25,000 | 2018 | 167 |
Many of us are old enough to remember Dow 1,000 or 5,000 and moves of 7 or 33 would have been unremarkable back then. So with the Dow at 25,000, we have to retrain our thinking so that a move up or down of 167 points is now unremarkable. I recognize that it is difficult to that with the media screaming at us about three-digit moves, but a move of 167 points on the Dow is what history tells us is average. And unlike Lake Wobegon, where all the children are above average, the Dow moves every day and the average (at this level) is 167 points.
Cheers and happy holidays!!!
