How To Think Critically About Fear-Inducing Market News

Earlier this year after a down day in the stock market a headline read “Dow falls more than 500 points…”

These attention grabbers are designed to do just that – grab your attention and then sell ad space while your anxiety rises. It reminded me of the book I read a few years ago, Factfulness, which I wrote about here. The author talks about the importance of bringing in the denominator to any statistic. In this example, where the Dow falls more than 500 points, bringing in the denominator means asking the question “It fell 500 points out of how many total points?” The answer is roughly 30,000. This creates a fraction (500/30,000 or 1.6%), which is immensely more useful in interpreting data. But there is a reason they report market drops in points and not percentages – the reality of a 1.6% drop does not stir up its readers nearly as much. And, if the readers don’t click on it, they can’t sell ads.  

For comparison, here is a newspaper clip from the infamous Black Monday in 1987 after a nearly 20% drop in the stock market.

It’s sad and a little funny that out of context, the media makes these two market events look the same in their headlines – a 500-point drop in the Dow. But as any investor who lived through October 1987 can tell you, July 2022 pales in comparison.  

Remember, always bring in the denominator to help you interpret the news.  

Happy Planning, 

Alex

This blog post is not advice. Please read disclaimers.