Wall Street’s Big Bounce, Don’t Start Cheering yet
It’s time for investors to celebrate, right? On Monday the Dow Jones industrial average ended up a stunning 936 points, the biggest one-day point gain in history — all the more remarkable considering the index of blue-chip stocks had just come off its worst weekly loss on record. The S&P 500, a broader measure of the stock market, saw its largest one-day percentage gain since 1939, and the tech-heavy NASDAQ jumped 12%. Seems a gaggle of European countries rolling out billions of dollars to guarantee loans and recapitalize banks, and indications that the U.S. might do some of the same, was the confidence boost everyone needed.
Just don’t be surprised if it doesn’t last. Trying to predict whether the stock market will go up or down on any given day is a fool’s game, but one thing is for sure: we live in highly volatile times. Wild swings to the upside may feel great, but they’re still wild swings. That sort of dramatic movement can go both up and down, as we have witnessed.
These days, measures of volatility are off the charts, including the one Robert Engle, a Nobel Prize–winning professor of finance at New York University, keeps tabs on. According to his calculations, which are based on past stock movements, the S&P 500 has a pretty decent chance a year from now of being worth either four times what it is today — or a quarter as much. That absurdly broad range, which falls in line with other volatility barometers, is indicative of how haywire stocks have been acting. “You saw that kind of volatility in the Brazilian and Argentinean markets in the beginning of the 1990s,” says Engle. “You don’t really expect to see it in developed economies.”
So maybe it’s not time to get out the champagne quite yet. Instead, you might keep in mind that one characteristic of such a volatile market is that news, good or bad, gets amplified — and that there will be plenty of news to digest the rest of the week. On Tuesday, bond markets in the U.S. will reopen after having been closed for Columbus Day, and investors will get their first real look since the weekend at how much, if at all, credit has thawed. The rest of the week will bring a slew of economic reports — retail sales, consumer prices, housing starts — and corporate earnings, including those from financial firms such as JPMorgan Chase, Wells Fargo, Citigroup, Merrill Lynch and BlackRock. Will those reports send stocks soaring or back into the trenches? It’s a great question — with an unknowable answer.
So as much as you might be tempted to sneak a peak at your brokerage statement at the end of a 936-point day, the best advice remains the same: ignore the tick-tock of the markets and focus on long-term investing goals. Last week, in the wake of nauseating stock-market losses, San Francisco–based financial planner David Yeske sent out a letter to clients suggesting they make the following promise: “Today, I will not watch CNN, MSNBC, Fox News or any other media source that thrives on bad news and reminds us of it 24/7. Today, I will not check the value of my portfolio to see how much I have lost, or gained. Today, I will use the time saved by avoiding th[ose] things to read a book, watch a movie, take a walk, or take a nap.”
That is great advice for a down market. And also for a day that ends up.