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Why Were Ignoring Big Stock Market Moves

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Nov 25 2008 8:06pm EDT

Why We're Ignoring Big Stock-Market Moves

Megan Barnett notes today that extraordinary volatility is being met with shrugs. It's true that it's something to which we're getting accustomed; I think there are two main reasons.

The first is that in normal markets, a huge swing tends to actually mean something. People pay attention to 500-point moves in the Dow mainly because of what they bespeak, and right now 500-point moves in the Dow can mean anything, or nothing.

The second reason is that volatility numbers are exaggerated as a result of the distance that stock markets have fallen. A 500-point move in the Dow is a 6% swing, these days; back when the Dow was at 14,000, it was only a 3.5% swing. If the absolute moves remain constant, and prices fall, then volatility rises. A lot of the recent spike in the VIX, I think, is largely a function of lower prices: if it was somehow measured in dollars rather than percent, it wouldn't have risen so much.

Put those two together, and exercises along the lines of wondering whether we've ever before had two back-to-back 6% up days in the Dow become largely academic. I think at this point we're all painfully aware that volatility is at unprecedented levels. If you want to find a few anecdotal datapoints to illustrate that, fine. But big stock-market moves aren't really news any more, or particularly interesting.

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