The Worst Plunge In Years

In late July North American stock markets suffered the worst decline in years. Or did they?

I don’t mean to say that the markets didn’t come down. They did. What I mean is, was it really the worst downturn in years? Well, yes and no. And it’s mostly no.

Here’s the thing about the financial news – for most people it is really boring stuff. And that’s a bit of a problem for the people in the business of reporting financial news. Boring stuff doesn’t get people’s attention, and the media needs to have people’s attention in order to attract advertisers. And, at the end of the day, the name of the game is selling advertising.

So how do you get peoples attention? Well, dramatic phrases like “the worst plunge in years” are a good start. Check it out for yourself. Make a note of where the Toronto Stock Exchange index is right now. Now follow the news for a week. You’ll probably notice that the markets don’t go up; they soar. They don’t go down either, they plunge. At the end of the week, compare where the TSX is. Chances are, even after all that soaring and plunging, it will be within one or two percent of where it was when we started our little experiment.

So the question is, if it’s absolutely routine for the markets to soar and plunge, soar and plunge, soar and plunge, are these really the right words to describe a normal business week?

Absolutely. If you are in the business of getting people’s attention, that is. After all, how many people are going to spend a lot of time looking at a story that basically reads “same old stuff going on today, nothing unusual at all.”

During this latest bout of volatility some of the stories that I saw in the mainstream press were pretty balanced, actually. Which is cool, since I was expecting more hyperbole. But even balanced reporting can contain some flamboyant language. I’m reading things like “a rush for the exits”, that the markets got “hammered”, how they are “in free fall”. Even how, from one perspective, July 2007 was worse than what followed the September 11 terrorist activity.

One of the things that I heard was July 25, 2007 was the worst day for the markets since October 19, 1987, a day more commonly known as Black Monday. Whoa, cowboy, time to reign it in a bit.

In a world of soar and plunge, soar and plunge maybe “hammered” isn’t out of place, but “worst day since 1987” is over the top. It’s a phrase that may technically be accurate, but not from a perspective that anyone really cares about. On October 19, 1987 the Toronto Stock Exchange 300 Composite Index plunged 407.20 points, (There’s that word plunged again!) to close at 3,191.38. On July 25, 2007 the markets plunged 400.17 points. Except this time they closed at 14,068.16. So why is a 400 point drop in 2007 not as big a deal as a 400 point drop in 1987? Simple math. Taking 400 points off of a 3600 base is a much bigger decline in percent terms than taking 400 points off of a 14,400 base. 400 points in 1987 meant a single day drop of 11.3 percent. In 2007, 400 points is only 2.77 percent.

The bottom line is that these “points” are just a method of measurement. It’s the percentage change that counts, and clearly losing 11.3 percent in one day is a bigger deal than losing 2.77 percent. Four times bigger, actually.

Meanwhile, to put the July 2007 headlines in perspective, at the time the Toronto Stock Exchange was up about 13 percent year-to-date. And it’s pretty normal for things to cool off when they go up that far that fast.

This article was posted in All Columns, Money Management.
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