Since I began working in the financial services industry in 1987, I’ve noticed that investors seem to continually feel that the current stock market has been more volatile than it was in the previous five or 10 years. This thinking was brought to my attention once again recently when a client indicated that they felt like the stock market today was more volatile than it has been in the past. I agreed that it sure feels that way. But is it really?
I decided to do some research, and I was a little surprised at what I found.
Today it’s not uncommon to have the Dow Jones Industrial Average, a measure of large U.S. company stocks, swing up or down 100 points in a day. In fact, it’s not uncommon to have moves of 200-300 points in a single day. That sounds volatile, right? However, when we dig deeper we find there is more to the story.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
In the chart below I looked at each decade starting in the 1930s and outlined the number of days that the stock market rose or fell more than 1%. What you notice is that since 2010 the number of such days is actually lower than during the previous four decades (1970-2009). So far this decade 11% of the days have been up more than 1% and 9% of the days have been down more than 1%.
I also looked at days when the index rose or fell 2% or more. The results below show that stock market volatility since 2010 has been quite similar to past decades.
If current stock market volatility is similar to that of the past, why does it feel so much more volatile? The reason is actually quite simple. The index is much larger now, so a 1% move up or down represents a far greater number of points. As you can see in the chart below, on the first trading day of 1980 the Dow closed at 825. One percent of 825 is 8.25 points. Since then the stock market has climbed. By June 15, 2018, the index was up to 25,090. One percent of 25,090 is 250.9 points. So, if the stock market, as measured by the Dow, is now at 25,090 and falls 250.9 points, that is the same as an 8.25-point drop in 1980.
Investors hardly notice days when the Dow drops 8 points now, so naturally when it drops 250 points they feel like volatility has gone sky high by comparison. As you can see, in order to measure volatility, we need to look at the percentage increases and decreases as opposed to the point increases and decreases to get an accurate impression.
Volatility since 2010, as measured by a daily drop or gain of more or less than 1%, has actually been lower than it has been compared to many past decades. Consequently, there is no reason for alarm.
-
Seven Surprising Reasons Retirees Are Going Back to WorkSure, money is a big reason to come out of retirement, but it's not the only reason retirees are doing it.
-
Dow Gains 617 Points as Rate Cuts Near: Stock Market TodayWednesday's economic data didn't shift Wall Street's expectations that the Fed is preparing for a rate cut at next week's meeting.
-
Four Clever and Tax-Efficient Ways to Ditch Concentrated Stock Holdings, From a Financial PlannerHolding too much of one company's stock can put your financial future at risk. Here are four ways you can strategically unwind such positions without triggering a massive tax bill.
-
Beyond Banking: How Credit Unions Serve Their CommunitiesCredit unions differentiate themselves from traditional banks by operating as member-owned financial cooperatives focused on community support and service rather than shareholder profit.
-
Answers to Every Early Retiree's Questions This Year, From a Wealth AdviserFrom how to retire in a crazy market to how much to withdraw and how to spend without feeling guilty, a financial pro shares the advice he's given this year.
-
The Risks of Forced DST-to-UPREIT Conversions, From a Real Estate ExpertSome new Delaware statutory trust offerings are forcing investors into 721 UPREIT conversions at the end of the hold period, raising concerns about loss of control, limited liquidity, opaque valuations and unexpected tax liabilities.
-
I'm a Financial Adviser: You've Built Your Wealth, Now Make Sure Your Family Keeps ItThe Great Wealth Transfer is well underway, yet too many families aren't ready. Here's how to bridge the generation gap that could threaten your legacy.
-
Want to Advance on the Job? Showing Some Courtesy and Appreciation Could HelpTwo business professors share their insights about the impact of digital communication on the social skills of some in Gen Z and the importance of good manners on the job.
-
From Job Loss to Free Agent: A Financial Professional's Transition Playbook (and Pep Talk)The American workforce is in transition, and if you're among those affected, take heart. You have the skills, experience and smarts that companies need.
-
A Financial Planner's Top Five Items to Prioritize When Your Spouse Is IllDuring tough times, it's easy to overlook important financial details, but you'll be so much better off if you take care of these things right now.
