What a 350 Point drop in DOW means

Unless you really are not paying attention you probably realize that the Dow Jones Industrial Average dropped 348.63 points today.  At one point during the day it had actually dropped almost 1,000 points (998.5 to be exact).

All of this because some Greeks rioted in the streets?

Well kind of.  Not that the problems with the economy in Greece is new news, we have been hearing about it for months.  The riots were actually a reaction to stipulations that the rest of Europe put on Greece in exchange for "bailing them out".  If there is one thing the stock market does not like, it is uncertainty.  Good new or bad news does not have anywhere near the impact that news of uncertainty has.

So what is the DOW anyway?  It is an index of 30 large US based companies stock prices.  If you don't already know there are literally thousands of US based companies whose stock is publicly traded, so 30 is a pretty small portion of the total, but it is a historical indicator of the overall attitude of the US stock market.  They take a weighted average price of the stock price for each of the 30 companies and calculate the Dow Jones Industrial Average.  General Electric,  one of the 30, has been part of the DOW since 1907.  The most recent additions Cisco Systems and Traveler's Insurance were added just under a year ago.  Yep companies that are included in the DOW do come and go.  Eight of the companies have been included in the index for over 30 years.  Five were added during the 1980's, 10 were newly added during the 1990's and 7 came on since 2000.

So if the DOW drops does that mean large US companies are in trouble?  Not necessarily, most large US companies are dependent on a global economy these days, but a lot of the drop in stock prices today was just people wanting to jump off the band wagon that has been steadily growing for the past year.  It is also necessarily a black eye to the US economy as a whole as probably the largest beneficiary of the rush to sell stock was the US Treasury.  The value of US Treasury bills (measured in yield) actually skyrocketed today also as people were looking for a "safe" place to park their money while they wait to see what happens with the stock market.

One statistic you can generally count on is that 80% of the time, stock market pundits will be wrong about which direction the market is going in the short term.

I kind of like those odds anybody want to go to "Vegas" with me?