Volatility: Resurgent Or Not?
by Marshall Blume
When the Dow Industrial Average was at 700, Keith Funston, a former president of the NYSE, recommended that the Dow be split ten to one. He foresaw that the Dow would continue to rise in value over time with the consequence that the reported changes in its value would become larger and larger and would scare investors. Today, the Dow is around 17,500, and a two-percent movement is 350 points. If the Dow were instead 70, a two-percent movement would be only 1.4 points—a less scary number.
Of relevance of course is the percentage change and not the absolute change. Nonetheless, broadcasters routinely cite the absolute change, and this is what permeates the radio waves. To be sure, apps like Bloomberg now report the percentage change as well, and this is as it should be.
As the magnitude of both the Dow as well as the S&P 500 increases, it is almost a foregone conclusion that the size of daily changes will increase. The relevant question is what has happened to percentage changes over time. To answer this question, we turn to an analysis of daily returns for the S&P 500 from 1950 through 2015—a total of 16,650 daily returns, encompassing 66 years.