Monday, December 16, 1996
Will the Dow Drop with the Temperature?
by [email protected]

In a recent Fool Global Wire, while discussing a 120-point drop in the Dow, David Gardner writes that a "two-percent change in the price of a car or the average daily temperature high for your hometown is something you probably wouldn't notice." This made me wonder.

Not so much about the price of a car. We just purchased a new car, so I am well aware of the inflation in the years since our last purchase. Living in Rochester, NY, though, every degree seems important at this time of year. However, two percent of 35 degrees is only 0.7 degrees, nothing to worry about, right?

Those 35 degrees, though, are measured on the arbitrary Fahrenheit scale, but we should be looking at an absolute scale. Lord Kelvin (William Thomson) created such a scale. Our daily high at this time of year is roughly 275 Kelvin (K). An absolute two-percent drop equates to a drop of 5.5 degrees K (equivalent to 10 degrees F). This would certainly have a noticeable impact -- especially on our heating bill.

So, if two percent can be important, is it panic time for the market? I think not. First of all, the Dow Industrial index is not an absolute measurement of the market. Oh? You say broader (absolute) indices can drop two-percent quite easily? Fear not, O Foolish One. Yes, an absolute and permanent drop of two percent in the market, or the daily high in my hometown, would be reason for concern. Fortunately, we are talking about a single intra-day drop of two percent in the market. I can live with that. Otherwise I would have 'fled south' long ago. A single-day drop in our high temperature, with no supporting changes in solar and geothermal fundamentals, is no cause for alarm. So it is with day-to-day changes in market indices, when there are no supporting changes in business and market fundamentals.