Back in February of this year, the Dow Jones Industrial Average lost 1,032 points in a single day. The media hyped it as the largest decline on record, which was misleading. Yes, it was the largest POINT decline, but not the largest one-day PERCENTAGE decline. This is my biggest pet peeve about market reports. We have got to break our addiction to quoting point moves in the Dow.
Barring a change in index calculation, I would not be surprised to live to see a 5,000 point decline in the Dow one day. That’s just that math, and my math may be too conservative. As the market posts positive returns, the base points of the index grow with it. We are currently around 25,000 on the level of the Dow. If the average market return for the next 45 years is 7%, the Dow will be around 525,000. A 1% decline from this level is 5,250 points. It’s that simple.
Can you remember the reason the Dow lost 1,032 points on February 8th?
If not, don’t be shocked. Our minds suffer from short termism, and today we’re focused on another crisis du jour. To refresh your memory, ten short months ago, the market was worried that the 10-year Treasury yield had risen to almost 3%, up from 2.5% at the start of the year. The 10-year Treasury has since crossed 3%, rising as high as 3.25%, before falling back below 3% yesterday. The February selloff caused a spike a volatility that blew up a few silly investment products designed to short volatility. Otherwise, investors recovered uneventfully from that February decline.
Today, headlines are flying again because Dow lost almost 800 points, or 3.1%. There are legitimate concerns over the escalating trade war with China and the cost of tariffs to American businesses and consumers. We don’t know how this will end or what it means for markets in the near-term. However, you probably won’t be able to recall the reason the market dropped on December 4, 2018 a few months from now. You can add it to the chart below as what I like to call the list of crisis du jours. There will always be a new one to worry about.
Investing is not easy, and returns elude those who trade on emotions. As your radio, smart phone, television, and smart speaker try to scare you tonight about the market doom and gloom, remember that these knocks are par for the course for investors.