On October 19, 1987, the stock market had a nervous breakdown. I was there to watch, and I almost had one with it. The Dow dropped a little over 500 points. At the time, with the DJIA at 2,250, that was a 20%+ freefall! Today, with the Dow above 16,300, it would be a 3% selloff. And that means it's way past time to adjust our thinking.
When the Dow drops 200 or 300 points in a single session, it generates huge headlines. It shouldn't. Historically, drops of 1%-2% have been quite common and don't carry any particular significance in and of themselves. But emotionally we still react as if they do.
Chuck Jaffe tackles the problem head-on in his MarketWatch column today.
[T]he Dow stopped being the best measure of the market several decades ago.
The problem is everyone else, folks who stubbornly cling to the Dow as meaningful, particularly when there’s a triple-digit move and some talking head explaining why things were so volatile.
Buried in those news stories dedicated to the daily coverage of market moves are real reasons to find better market measures, but also to ignore most of the market noise generated by all headlines about all indexes....
Triple-digit days on the Dow are treated today as if they are just as meaningful as when they first came into the public’s consciousness, which was in the days leading up to or away from the Black Monday crash of 1987.
One of the adjustments new SMI readers have to make is getting used to our using the Wilshire 5000 and the S&P 500 as our representatives of "the market." (I do admit to referencing the Dow last week when discussing volatility…citing S&P 500 point reversals on back to back to back days just doesn't communicate drama to the average investor).
We rarely use the Dow when explaining market movements or making performance comparisons. But that doesn't mean you can escape the Dow because, to Jaffe's chagrin, the media refuse to give up on the venerable index.
So, to help you keep your perspective when you hear news reports of Dow triple-digit declines, I offer this bit of advice: Don't take notice unless the drop is 500 points or more. That would amount to a 3%+ drop which would actually be newsworthy. 500 is the new 100.
For those contemplating abandoning their plan in favor of the sidelines, I give you "10 Things To Consider Before You Let Your Emotions Drive You To Dump Stocks."