Why Newspapers Should Ignore Stock-Market Volatility

I get very irritated when newspapers splash one-day stock-market movements all over their front page for no good reason. Every time the Dow drops 300 points or more, it seems, there's some kind of rule saying that big panicky headlines have to extrapolate wildly. But maybe rises of 300 points or more are rare enough that there isn't a memo about those, because this morning's headlines are sober to nonexistent. Indeed, the NYT goes one further and puts on its front page today a truly excellent David Leonhardt column which, while certainly being about the markets, has nothing whatsoever to do with yesterday's 320-point run-up in the Dow.

In reality, of course, the timing is a coincidence: Leonhardt's column appears on Wednesdays, this was a good column deserving of the front page, and the unexpected bounce in the stock market on Tuesday only affected things to the extent that the first sentence needed to be tweaked a bit. But that's all good: it shows that the NYT's editors are sober enough to realise that one-day upward moves in stock market really don't mean very much. With any luck, they will use their demonstrated extrapolation skills to work out that the same is true of one-day downward moves in the stock market, too.

Leonhardt's point is basically that the "bad news" in the markets is bad news mainly for that small minority of people with lots of money invested in the markets. For most of us, it's not really bad news at all. The weak dollar and rising savings rate bode well for the long-term health of the US economy, and a lower stock market just means that stocks are cheaper for those of us a long way from retirement. Even the high oil price has a silver lining: it acts much like a carbon tax (without the associated government revenues, of course), helping to bring renewed focus on fuel effiency and other carbon-reduction technologies.

My only beef with the column, and it's a minor one, is that Leonhardt seems to be keen on the percentage-off-its-peak measure of how the stock market is doing. Really, only day traders care much about how far off its recent peak a stock market is. Stocks are still up significantly this year, and up even more on a trailing-twelve-months basis. So I'm not convinced it's really sensible for Leonhardt to talk about "this year’s market drop".

Other than that, however, it's great to see the markets-as-horse-race meme given a well-deserved skewering on the front page of the NYT. Now, if only someone could tell CNBC...