A lesson in market volatility
Stocks that dropped 40% last week are now up 20%. What gives? Is it suddenly a better time to invest in everything from banks to fast food? Jeremy Hobson reports on the science of volatility.
Charting volatility (iStockphoto)
More on The Economy, Health, America's Financial Crisis
TEXT OF STORY
Kai Ryssdal: Here's something to bear in mind as you consider the 936 point ride the Dow took us on today. If you're worried about market volatility, those triple digit swings we've been seeing for what seems like forever now then you need to know that up can be as bad as down. And a 936 point gain can be as troubling, and as irrational, as a 777 point drop. Is there a reason stocks that dropped by 40 percent last week are up 20 percent today? Is today all of a sudden a better time to invest in everything from banks to fast food? Marketplace's Jeremy Hobson reports on the science of volatility.
Jeremy Hobson: To help illustrate volatility, I've asked my father Ian Hobson, who is a pianist, to play what the market sounds like when things are relatively calm. Now, last week was anything but calm. United Health Group, for instance, had a terrible time. Dad?
Ian Hobson: Jeremy, I'm going to play United Health October Surprise, First Movement.
That's a 30 percent loss in the course of the week. Then there was today, up 30 percent. Now, that's volatility. Lawrence White is an economist at NYU's Stern School of business. He says when fear kicks in investors may ignore a company's fundamentals and take on a herd mentality.
Lawrence White: A few people say, well gosh, those people are selling, they must know something. And that's when you get this kind of snowballing high volatility kind of events.
It works both ways of course. Investors often chase a stock up the market if it appears hot. But White says this kind of volatility is reminiscent of the 1929 and '87 crashes.
White: What is exceptional I think is the length of time that we've experienced high volatility this time around.
And it continued today. Just wait till you hear the numbers.
In New York, I'm Jeremy Hobson for Marketplace.
Comments
Comment | Refresh
From NC, 10/13/2008
This story misses the point completely. Creating a musical representation of volatility may be cute, but the important point is to understand why the market as a whole, or any stock in particular, is volatile.
Post a Comment: Please be civil, brief and relevant.
Email addresses are never displayed, but they are required to confirm your comments. All comments are moderated. Marketplace reserves the right to edit any comments on this site and to read them on the air if they are extra-interesting. Please read the Comment Guidelines before posting.
You must be 13 or over to submit information to American Public Media. The information entered into this form will not be used to send unsolicited email and will not be sold to a third party. For more information see Terms and Conditions and Privacy Policy.