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Extreme Turbulence in the Markets? Maybe Not

On Friday, I read a CNN report which had a headline screaming Extreme turbulence: Stocks suffer steepest drop of 2014”. The report referred to how the Dow Jones Industrial Average had “plunged” 355 points on Thursday night, and had marked the worst day in 2014 on an absolute-point basis.

The Dow Jones is one of the three major indexes – the others being the S&P 500 and the NASDAQ – which track the US stock market. The CNN article went on to talk about how October is shaping out to be a scary month, and that investors were left trying to catch their breath.

But if you looked beneath the surface,  words like “extreme” and “plunged” were pretty, well, extreme words to use.

Reframing the numbers

To show you what’s really “beneath the surface”, here’s a table on how much the Dow Jones, S&P 500 and NASDAQ have changed compared to their recent highs. All three have barely gone below 7% from their highs.

Index 52-week high Close on 10 October 2014 % Change
Dow Jones 17,531 16,544 -4.65%
NASDAQ 4,611 4,276 -7.26%
S&P 500 2,019 1,906 -5.60%

Source: Yahoo! Finance

When viewed through the table above, it would seem like CNN’s purported market turbulence is, in fact, quite normal. How normal? Well, historically, the American stock market has fallen by 10% from a recent high once every 11 months on average going back to 1928. Given this as a backdrop, the kind of falls we’re seeing now in the table above – which might seem scary without historical context– are actually, well, kind of mundane.

Furthermore, if we happened to have seen the Dow Jones on Wednesday morning and somehow fell asleep until this morning, the American market benchmark would have dropped by a paltry 1.05%. For the record, the SPDR STI ETF (SGX: ES3) had also barely budged from Wednesday’s close as of today. The SPDR STI ETF is a proxy for Singapore’s market barometer, the Straits Times Index (SGX: ^STI).

So as you can see, when viewed through a more Foolish historical lens, the drops in the US stock market are hardly “extreme”, and the indexes have hardly “plunged”.

Foolish take away

Newswire headlines may sometimes try to scare you witless. But as Foolish investors, we should keep our numbers in context all the time. Instead of staring at the daily fluctuations of the market, try viewing the changes in the indexes against its 52-week high, for instance – we’d often get a much more boring but sane picture when doing so.

In any case, instead of worrying about market volatility (which hasn’t yet arrived), as Fools, we may instead look towards taking advantage of any volatility. To do this, we can start by keeping in hand a watchlist of shares to buy and wait for the opportunity to swoop in when prices start falling.

To learn more about investing and how to take advantage of volatility, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead. Also, like us on Facebook to follow our latest hot articles.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.