The remarkably steady equity markets that investors enjoyed in 2017 changed dramatically in the first quarter of 2018. Volatility returned with a vengeance and hasn’t dissipated. Triple-digit moves in the Dow Jones Industrial Average (DJIA or “Dow”) have become a near daily occurrence, which generally unnerves investors and heightens overall anxiety about stocks. Among individual investors, the Dow remains overwhelmingly the index used as a proxy for the markets despite the fact that the S&P 500 index is much broader proxy. And virtually every answer to “how did the market do today?” includes the Dow’s gain or loss in points not percentages. “Terrible day – the Dow was down 300.”

As we watch these intra-day swings, particularly for the Dow, please consider three important caveats:

1. The Dow is an index of just 30 large-cap stocks. It is managed to provide a representative sample of the economy. However, with only 30 stocks in the index, it is impossible to include some of the most important companies in significant segments of the markets. For example, four enormous companies that drove a huge portion of the performance in the S&P 500 over the past several years aren’t in the Dow at all: Alphabet (Google), Amazon, Facebook, and Netflix.

2. The Dow is a price-weighted index. This means that the companies in the index with the highest absolute stock prices (not the size of the company) have the largest impact on the movement of the index. Apple is more than four times larger than Boeing in market cap. Yet Boeing’s stock price has roughly twice the impact on the index as movements in Apple simply because the stocks trade at $335 and $175, respectively. Apple is the largest stock in the S&P 500 and Boeing ranks 23 largest in that index. General Electric is by far the lowest priced stock in the index, so the fact that it has declined from $31 to $13 created little drag on the Dow’s performance.

3. The absolute price levels of the Dow and other indexes are many multiples higher than they were 20, 30, 40 years ago. Historically, intra-day moves of 1.0% or more are very common (more than 70% of the time). In 1988, a 1% drop meant the index shed 20 points. Today, that same move in percentage terms is nearly a 250-point drop. (The index was 1,988 then versus 24,140 now).

This is not to say that increased volatility isn’t jarring, but some perspective and a longer-term focus might make it less so. For us, it’s relatively easy to tune out the day-to-day trading noise and focus on the fundamentals of our holdings. Eventually, stocks reflect the underlying fundamentals. In the short-term, markets have proven to swing wildly from loss to gain and vice versa. In February alone, there were five trading days in which the Dow oscillated more than 1,000 points. That’s a strong argument for maintaining focus and not reacting to intra-day volatility, whether the moves are large in point terms or percentage terms or both.

For all the volatility and triple-digit point moves, the indexes finished the quarter like this:

S&P 500 Total Return: -0.76%
Dow Jones Industrial Average: -2.49%