Dec 30, 2018 - Economy & Business
The return of an old friend
Here's Matt Egan's summary of one month in the stock market, for CNN: "Not one but two 1,000-point plunges for the Dow. And a powerful comeback... easily one of Wall Street's wildest months since 2008... A real roller-coaster. A wild ride."
- The month in question? February 2018. With all the other crazy going on in the world this year, you can be forgiven if you've forgotten all of February's noise already.
- Stock market volatility is a fact of life. Irregular spikes in volatility — including the one we're in the middle of right now — are also normal. (Ben Carlson has a great chart of stock-market volatility going back to 1928 which also shows just how normal it is.) The difference this time is that market volatility has become politicized, thanks to numerous presidential tweets.
- That said, if you enjoy rollercoaster rides at Christmas, last week would have made you really happy. The Dow's intraday range was 548 points in a half-day session on Monday, 1,166 points on Wednesday, 871 points on Thursday, and 401 points on Friday. (On Tuesday the market was closed.)
- Needless to say, there was no news driving those swings. (Also, stop measuring Dow swings in point terms. The crash of 1987 was vastly bigger, and that was only 508 points.)
Be smart: A stock price is the discounted present value of a company's future cashflows. Tiny adjustments to expected future growth rates, or even tinier adjustments to the discount rate being used, can result in large swings in the fair value of the stock.
We see shares trading at a specific price, but conceptually it might be better to think of them as a probability distribution. Right now, those probabilities are wider and more uncertain than at any point since the financial crisis.
Legend avers that an alert young man once found himself in the immediate presence of the late Mr. J. P. Morgan. Seeking to improve the golden moment, he ventured to inquire Mr. Morgan’s opinion as to the future course of the stock market. The alleged reply has become classic: “Young man, I believe the market is going to fluctuate.”It did. It always has. Perhaps it always will.— Laurence H. Sloan, Security Speculation: The Dazzling Adventure (1926)