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Volatility, and Not Seeing the Forest for the Trees

The return of downside volatility has exposed problems with perception and with certain exchange-traded products.

On Tuesday, the front page of the Chicago Sun-Times declared, “Dow’s Historic Drop: 1,175-point plunge—its biggest one-day loss in history—puts the once-roaring 2018 market in the red.” The headline correctly reported how much the blue-chip average fell, but it failed to provide any context.

Monday’s drop put the Dow Joneschart industrial average and the S&P 500 index about where they were in early December. Was that mentioned in any of the headlines you saw? I’m guessing not. How about today? The large-cap indexes are about where they were on Thanksgiving. Yes, we’ve given up two months of gains, but it’s normal to incur downward price volatility.

You’re likely not hearing this message because point moves are bigger attention grabbers. Monday’s 1,175-point drop was huge on an absolute basis, but not nearly so on a percentage basis. The Dow’s 4.6% loss, while sizeable, didn’t even crack the top 20 in terms of the largest daily percentage declines. During October 2008—in the midst of the financial crisis—the blue-chip average experienced three daily declines of greater than 7%. None of these were records either. The biggest daily drop on a percentage basis remains October 19, 1987 (aka “Black Monday”), when the Dow shed 22.6% of its value.

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AAII Sentiment Survey

Pessimism rose to a three-month high, while optimism fell to a two-month low. Both are within their typical historical ranges. More about this week’s results.
This week’s results:
  • Bullish: 37.0%, down 7.7 points
  • Neutral: 28%, up 1.5 points
  • Bearish: 35%, up 6.3 points
Historical averages:
  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%

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The Week Ahead

Fourth-quarter earnings season will remain busy with 57 members of the S&P 500 reporting. Included in this group are Dow Jones industrial average components: Cisco Systems Inc. (CSCO) on Wednesday and The Coca-Cola Co. (KO) on Friday. Many smaller companies will also report.

The week’s first economic report will be the January Consumer Price Index (CPI), January retail sales and December business inventories, all released on Wednesday. Thursday will feature the February Philadelphia Federal Reserve’s business outlook survey, the January Producer Price Index (PPI), the February Empire State Manufacturing Survey, January industrial production and the February housing market index. January housing starts and building permits, January import and export prices and the University of Michigan’s preliminary February consumer sentiment survey will be released on Friday.

Only one Federal Reserve official will make a public appearance this week, Cleveland president Loretta Mester on Tuesday.


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