Tuesday, September 23, 2008

A bit of perspective

There's something of a financial crisis playing out in the US at the moment. Forecasts of doom and gloom are pretty common right, with phrases such that this is the "worst since the Great Depression" floating around.

At the moment, we're hearing about the horrific crashes on Wall Street, with record breaking losses.

Taken completely out of context.

The absolute value of losses are indeed record levels. This is because the Dow Jones is worth one heck of a lot more than it used to be. At the moment, the Dow Jones Industrial Average is around 11,000, which is around what it was back in 2000. In 1990, it was less than 3,000.

The market has been sliding for the past year. As of the moment I'm writing this, the Dow Jones Industrial Average is down just under 17% for the year to date, and somewhere around 21-22% for the past year. Obviously, this is not a good thing.

On the other hand, on October 19th, 1987, the Dow Jones lost approximately 22.7%. On one day. It took 2 years to recover. Do you think that might be more recent than the Great Depression?

Keep in mind that percentage changes are a lot more meaningful than absolute value changes.