By: Kent Ragan
We have all heard this question asked and answered – many times. “What did the market do today (WDTMDT)?” I just made up the “WDTMDT” textspeak, hoping that this forum might launch its use — just not while driving, PLEASE! Maybe it will go viral!
As is sometimes the case, asking a question can lead to many other questions. While I tend to believe that WDTMDT is typically answered to the questioner’s satisfaction with, “The market was up/down (by so many points),” the question might deserve a response such as, “As measured by which index?” or even “What is ‘the market?’” Both are fair questions.
Initially, let’s use the New York Stock Exchange (NYSE) as “the market,” simply because it is the oldest stock exchange in the United States — dating back to 1792 — and is the world’s largest stock exchange in terms of the “market capitalization” or “market cap” (the total value of all stocks listed to trade on that exchange). The NYSE’s market cap is an approximate $20 trillion, having grown from $14 trillion five years ago.
With our definition of the market, WDTMDT is asking what happened to the value of the 3,000 or so stocks listed on the NYSE. Admittedly, we are very unlikely to overhear an answer similar to “The market cap of the NYSE went from $20 trillion to $20 trillion, 200 billion today. We are VERY likely to hear an answer like, “The market was up 200 points today,” or “The market closed at 20,800 today.” Why the latter rather than the former?
Perhaps the easiest answer is that it would be cumbersome to discuss market performance in terms of trillions of dollars, with daily changes sometimes amounting to $200 billion or more. While a 1 percent change in market cap is admittedly a large change in one day (annualize that by multiplying the 1 percent change by the approximately 250 trading days in one year to see that is a huge change), it can certainly happen, and would amount, approximately, to a $200 billion change in market cap that day. Given all of the zeroes involved, there must be an easier way to describe the market’s movements. Enter the various stock indexes.
Kent P. Ragan, Ph.D., is professor and head of the Department of Finance and General Business at Missouri State University and holds the Chartered Financial Analyst credential. He may be reached at Kentragan@missouristate.edu.
This article appeared in the May 20, 2017 edition of the News-Leader and can be accessed online here.