Stock indexes such as the Dow Jones industrial averages and Standard & Poor’s 500 stock index were invented to give the public understandable information about the general movement of equities prices.
But with time, inflation and the proliferation of exchanges and indexes, reporting that an index rose or fell by a given number of points confuses more than it informs.
The public would have a much better sense of what is going on in financial markets if the index compilers and the media would simply report the percentage change in an index and forget about the number of points that any particular index changed.
A week ago, I was tracking how financial markets were reacting to various reports on producer and consumer prices. I clicked on a well-known Internet quote provider and got the following information: The Dow was up 83.27 points, the Nasdaq up 47.54, the S&P 12.81, London’s FTSE up 6.1 points, the Paris CAC 40 down 13.27, Frankfurt’s DAX up 4.63, Japan’s Nikkei up 2809.54, Hong Kong’s Hang Seng up 364 and Brazil’s Bovespa up 76 points.
Now what do these quotations tell me? Not really a blessed thing.
I skipped immediately to another bit of information given in parentheses for each market, the percentage change that the quoted point change represents. In the example above the Dow was up 0.8 percent, the Nasdaq 1.8 percent, the S&P 1 percent, FTSE 0.1 percent, CAC 40 down 0.3 percent , Nikkei up 1.6 percent, Bovespa up 0.7 percent, DAX up 0.1 percent and the Hang Seng up 3 percent.
Looking at the percentage changes makes comparisons much easier because it puts them all on a common scale. A 1 percent change is a 1 percent change in any country and on any market, regardless of when the index for any particular market was started. Reporting percentage changes give immediately understandable information, giving the points obscures it.
Consider other arbitrary indexes designed to measure financial change over time.
Several days ago the Bureau of Labor Statistics reported its first estimate of how much consumer prices changed from August to September. The bureau estimates such changes using the Consumer Price Index.
That index had risen from 167.1 points in August to 167.9 points in September. Did the bureau and the media say, “Consumer prices up 0.8 points?” No, they reported that the CPI was up 0.47 percent from the previous month.
Some also noted that a 0.4 percent increase per month would result in prices rising 4.9 percent if continued over a whole year. A few reported that prices were 2.6 percent higher than in September of 1998. But no one discussed where the Consumer Price Index was on either its 1967 or 1982-84 base-period scales.
Most people have no understanding of how a given point change will affect their lives. But they do know what price increases of 2 percent or 4.9 percent mean. So the Bureau of Labor Statistics press release and the related media stories are framed in percentage terms.
Let’s do the same for stock indexes. The media should simply start reporting changes in percentages, regardless of the number of points that represents on any arbitrary scale. For traditionalists who need to know how many points the Dow moved, regardless of how irrelevant that information is, the absolute point changes can be listed in parentheses in the body of the story the percentage changes are now.
And as long as we are making stock index reports more useful, let’s eliminate meaningless precision.
Stock quotation services and the media still report both points and percentages to two decimal places. For example, the Dow is at 10,325.24, down 145.01 (-1.38 percent) as I write this. The .24 and the .01 points may be mathematically correct, but are absolutely meaningless in terms of true information about the state of the stock market. Even the 1.38 percent is needlessly precise. Rounding to 1.4 percent gives the same level of useful information.
Stock indexes, like price indexes, are intended to give the public useful information. They would be more useful to the average person if everyone concentrated on the percentage change, which can be understood by nearly anyone, rather than on the point changes in any of several arbitrary scales.
© 1999 Edward Lotterman
Chanarambie Consulting, Inc.