By Ric Edelman
It’s inspired by TV, but it’s not a game
Pop quiz! What do the following have in common?
- Avian flu
- Swine flu
- "Mad cow" disease
- December 2012
Answer: During the past decade or so, all of the above subjects were hyped by media. Headlines and lead stories on the evening news often implied that we were all about to die. Tomatoes and spinach? Yes, even those ordinary vegetables were said to carry grave health risks.
As we all know, the only thing that died were those stories. (As for December 2012, the ancient Mayan calendar apparently says that is when the world will end. We’ll let you know if it proves true.)
“It’s all fear. It’s all about keeping you scared. It’s always something new that’s going to destroy the world,” says comedian Alonzo Bodden, who cites all of the above examples in his HBO comedy special, taking aim at the media.
Bodden is more than funny. He’s right: The media do tend to promote fear — what better way to boost ratings? — and they’ve been doing it a lot in recent months about the stock market and your investments. Fear is a huge factor behind much of the recent market volatility we’ve seen in the Dow Jones Industrial Average and S&P 500 Stock Index, and consumer fear has been instigated by the media.
So allow me to offer some calming observations. First, there’s a big difference between big point drops in the market and corresponding percentage drops.
In August, for example, the Dow fell 400+ points several times; the index fell 420 points on Aug.18, 513 on Aug. 4 and 635 on Aug. 8. (These were interspersed with several big gains, by the way, but more on that later).
Those declines, on a point basis, were among the worst 20-point declines of all time. Sounds worrisome. But wait: On a percentage basis, those declines were no big deal — just over 5%. In fact, daily market movements of 1% to 5% are quite normal. That’s just the way the market works.
But the media don’t tell you that. Maybe it’s because many journalists don’t understand percentages (which is probably not far from the truth, considering studies show that most Americans are poor at math), or maybe it’s because a Top 20 Point Decline is news, while failing to be in the Top 20 Percentage Declines isn’t.
Consider this: Would it be news if the Dow fell six points in a single day? Hardly. Yet when it happened on Aug. 12, 1932, that six-point drop constituted a whopping 8.4% decline — the sixth largest daily percentage drop of all time because the Dow itself was only 64 on that day. Six points is a very big deal when the Dow is 64, while a 420-point decline is not as big a deal when it’s falling from 11,410 on Aug.17 to 10,990 on Aug.18.
Likewise, consider Black Monday — Oct.19, 1987 — the biggest one-day percentage drop in stock market history (the Dow fell 23%). That decline was almost twice as big as the second-largest drop, which occurred when the market crashed on Oct. 28, 1929 (the Dow fell 13% that day, heralding the Great Depression). The Dow fell another 12% the following day, Oct. 29, 1929. Declines of 23%, 13% and 12% were rightfully fearful. But 5.5%, which is what we experienced in August?
Regardless of the fact that recent market volatility has been barely out of the ordinary — and far from mention in the record books — the media did their best to exploit the news. Consider Thursday, Aug.18, when the Dow fell 420 points, or 3.7%:
- That night, one evening news anchor began his broadcast by gushing, “Tonight, the storm after the calm. Turmoil returns to the markets, and the Dow plunges more than 400 points!”
- Early the next morning, the anchor of a television network morning show announced “breaking news” by saying, “Markets plummeting again over those new fears about a possible recession!”
- Not to be outdone, a competing morning show anchor said, “Good morning. Fear and loathing: the Dow plunges more than 400 points over renewed fears about the economy. Are we headed toward another global recession?”
- Meanwhile, a Friday morning headline on one major news organization’s Web site stated, “Stocks Get Demolished!” Its lead sentence: “Wall Street got socked on Thursday.”
Plunge? Plummet? Demolished? Socked?
That’s nothing. The headline on one of the nation’s leading news organizations that same day screamed: “Bloodbath for tech stocks!” The story said, “Tech shares plunged across the board Thursday following huge declines in global markets.”
In fact, the Dow Jones U.S. Technology Index was down just 5% — only a tad more than the performance of the overall stock market — which is not surprising, considering the fact that technology stocks are riskier and more volatile than the overall market.
But, really, now. A 5% decline in tech stocks is a bloodbath?
I suppose I wouldn’t be so annoyed if the media gave such ridiculous spin to rising markets. But they don’t. Instead, media outlets tend to bury positive news. Two examples:
A few days after the Dow fell 420 points, it rose 322 points. Certainly worthy of mention, no? Uh, no. The lead stories that evening were the East Coast earthquake, Hurricane Irene and turmoil in Libya. Not a single television newscast did a story on the Dow’s turnaround.
When Fitch, one of the three major U.S. credit ratings agencies, affirmed the nation’s debt rating at AAA, major financial newspapers buried the story. One placed it in Section 3, page 3. Weeks earlier, that same newspaper touted S&P’s rating cut at the top of page 1.
Why do the media do this?
It’s simple. They know that the only way to get your attention is to hit you with scary news. Good news doesn’t sell. But exploitation does. So they dramatize and sensationalize.
Just once, I’d like to hear a news reporter or anchor write or say the following. As of today’s market close, the average annual return in the stock market since 1926 is about 10% per year.
They could say or write that every single day, no matter what the stock market does on a given day. They could also say that, every day in America, hundreds of thousands of liquor stores don’t get robbed, and thousands of airplanes don’t crash.
But that’s not news.
Don’t fall victim to the media’s scare tactics. Ignore the headlines, but if one does concern you, talk with your financial advisor to learn what that news really means for you.