What makes today different  (or is it really different?)

By Ted Schwartz

June 18, 2012


One of my most knowledgeable, savviest investors asked a great question the other day. What is driving all the volatility we see in the market? There are some great culprits to consider as potential answers. Computerized trading in which “algorithms” rather than people make investment decisions?  The level of anger in the general populace can certainly be considered as a part of the problem? The uncertainty that pervades everything right now?  After pondering many possibilities for a bit, I thought it was time to go back to the question that must be answered before these questions- Is it different now than in the past? Is the market more volatile and irrational than in days gone by?

The answer is-NO! We are well within the normal ranges of market volatility. Considering the economic upheaval we are in, we should not find these market moves out of the ordinary at all. A study published at MarketThoughts.com has some data that is eye opening regarding market volatility. The years after the Great Depression lead the way with jaw dropping volatility figures. Figures provided for 1933 and 1932 (oddly ending on March 31st rather than 12/31) shows daily volatility of the Dow Jones Index averaging over 3% per day and that over 43% of the days in each year averaged over 2% moves per day! In terms of historic volatility since the year 1900, 2008 actually finished a paltry 30th in terms of the volatility of the Dow Jones Index on a daily basis.  The late 1990s and early 2000s were actually more volatile than more recent periods.

What makes it feel so crazy and makes us so uncomfortable then? My answer for this is………the media. I think while I was growing up Walter Cronkite did not make a story of every market move. Obviously the data shows that such moves are “normal”, so he gave us news that was more relevant and important. In this era of news as entertainment, they have discovered that people can be upset (and therefore watch) by concentrating on market moves and endless analysis of their root causes.  I personally try my best to avoid the cable stations that follow the markets. The endless analysis (also known as blither) can get my stomach upset and I am sure I could develop ulcers , stress related symptoms, etc. Sometimes, you need to just say no!