Understanding Market Volatility: Points vs. Percentages
If you’re a fan of public radio’s “Marketplace” with Kai Ryssdal, you might have noticed the music they play when they “do the numbers.” On days the market is up, it’s “We’re in the Money,” and when it’s down, they play “Stormy Weather.”
These musical cues are a fun way to connect with listeners’ emotions as they hear about market highs and lows. But they also illustrate how the media often uses various tactics to evoke emotional responses, making financial news feel more dramatic. Some of these methods are lighthearted, but others can be more misleading.
Take, for example, how market volatility is reported in terms of magnitude (the number of points an index moves) versus percentage change. Wall Street Journal columnist Jason Zweig has pointed out that while both describe the same movement, focusing on magnitude can often seem more dramatic.
Consider this: On Monday, August 5, 2024, the Dow Jones Industrial Average dropped 1,033.99 points from the previous week’s close. For many, that number sounds alarming. It’s a large, eye-catching figure that grabs attention, which is exactly what news outlets aim to do.
However, this number doesn’t reflect where the index started. The Dow had closed at 39,737.26 points on August 2. A 1,033.99-point drop represents a 2.6% decrease—a notable one-day decline, but one that feels less dramatic when expressed as a percentage.
Zweig puts it succinctly: “By focusing on the magnitude, rather than the percentage, of price changes, news organizations…make markets feel more newsworthy, and volatile, than they are,” even acknowledging that his own publication can be guilty of this practice.
Why the Difference Matters
As human beings, we are prone to emotional reactions and cognitive shortcuts that aren’t always in our best interest. When we encounter information—especially if it appears alarming—we may focus on it in unproductive ways.
The way information is framed can significantly influence our reactions. This framing bias is similar to seeing a glass as half full or half empty. In this case, a 1,000-point drop in a market index might cause panic and lead to impulsive selling or, at the very least, cause anxiety. But remembering that this “big” drop is actually a 2.6% decline can help you maintain perspective.
How to Approach Market News
What should investors do when faced with market volatility? Start by recognizing the role emotions play in processing such information. When you hear a seemingly frightening statistic, question its true impact. Does it provide complete information? Is it taken out of context or exaggerated for effect? If so, it’s wise to view it with skepticism.
Once you understand how your biases and the presentation of information can influence you, you can focus on the long-term. Historically, the market has always risen over time. Sticking to your long-term investment plan allows you to benefit from this pattern.
If you ever have questions about the market and how to align your investments with your financial goals, feel free to reach out to us. We’re here to help you make informed decisions.
Veronica Cabral
Wealth Advisor, Warren Street Wealth Advisors
Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor
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