Getting Used to Stock Market Volatility

Are you shocked or worried that the stock market is down 2% this morning? If you are, then maybe the best thing is that you stop looking at what the stock market does on an intraday basis. We've left the Great Moderation behind, and stock-market volatility with regular swings of 2% or 3% in a day is going to be here for the foreseeable future.

Maybe you're not worried about the stock market itself, but rather about what everybody considers to be the cause of the drop: an index measuring service-industry executives' business activity dropped to 44.6 in January from 54.4 in December. But here's the thing: it's a brand-new index, called the NMI, which the stock market is (purportedly) reacting to. Yes, the NMI was at 44.6 in January, but there's no NMI figure for December. The 54.4 figure was in the business activity index, which fell to 41.9 in January, but that's a narrower and more volatile measure.

So yes, this is a bearish survey. I expect there will be many more bearish surveys released in the next few months. The thing to remember is that it's not the bearishness which is jolting the markets, it's the fact that the survey came in below market expectations. But those expectations can hardly have been very finely calibrated, given that they were expectations for an index which has never before been published. In other words, it's probably fair to treat today's stock-market fall - like nearly all one-day moves in the stock market - as noise rather than signal. Last week the market went up, this week the market is down. It's normal.