Tuesday, February 27, 2007

Panic at the Exchange

A few hours ago, ABC Money posted this article which casts worry over the latest drop in the Dow Jones Industrial Average. This 200 point fall, the story goes, suggests we are in a slow-growth economy and the market is due for a correction.

First, the DJIA isn't nearly as important as people think it is. The number is the average stock price of 30 companies--just thirty--adjusted for stock splits. Granted, these are important companies whose performance has wide ranging implications. But they are not everything.

Second, the world is a messy place. This drop may be a correction for past over-optimism or next week may be the correction for today's panic. The latest tick of the market is not automatically indicative of its overall quality.

Each move of the DJIA isn't news worthy. Even big moves. They aren't nothing, but there are more important items to report. What is news worthy is the economy's next big thing, but because we don't know it we have to admit any measures of the quality of out economy--any economy--is subject to tremendous error.


Jason Br. said...

Uh, the second paragraph of the article you cite talks about the broader-based S&P 500 and NASDAQ...which also fell quite a bit. So not only is the journalism responsible, today's advance was broad-based. IN other words, your first point is directed at a straw man.

Re your second point: What should people wait for to get excited about? A three-percentage-point drop in a single day -- what's that, annualized? -- isn't worthy of comment? Really? Even if you go on the logic that today is over and tomorrow's a new day, my guess is that if you look through history, a 3% drop on high volume at the least portends some additional volatility! Maybe that's worth being aware of and worth reporting on - or maybe you would rather they talk about Britney Spears?

David said...

Strange. When I read the story yesterday it didn't mention NASDAQ or the S&P at all and the Dow drop was at 220. I must have linked to a developing story and I apologize for the confusion.

Stock market movements are certainly worth reporting-and this one in particular-I just have a problem when reporters and journalists start wide conclusions based on one day's trading. As a fan of Fisher Black, I'm surprised you don't see this drastically more likely to be noise instead of some genuine upset.

Notably, I heard on NPR today that some of the drop-not all but some-was due to computer error.

Jason Br. said...

The drop was entirely real. The seeming abruptness of part of the fall in the DJIA index was the result of computers having fallen behind in calculating its value and then abruptly catching up. (The value of futures on the Dow had fallen much further than the Dow itself, which seemed puzzling until the error revealed itself.)

What's noise and what's not? Pretty hard to tell, but look: any investor who completely ignores a 3% one-day move is stupid.

David said...

Of course it's hard to tell what's noise and what isn't and of course investors would smartly pay attention to such shifts. (Though the possiblity for loss aversion and panic makes a good case for completely ignoring even big moves.)

Still, that does not justify drawing any conclusions about the whole of the economy. It's just as likely (more likely, I'd say) to be mostly noise than to be mostly an authentic move to the "right" value.