What the Hell Happened to the Stock Market This Week? I Asked My Dad

On Monday, the Dow Jones Industrial Average dropped 588 points—the worst drop it had experienced since 2011—and then fell 205 more points on Tuesday. Just when the world seemed doomed and nothing would ever be OK again, the Dow bounced back, climbing 619 points on Wednesday. Yesterday, it continued to trend upwards, increasing by 369 more points. Today, everything's more or less evened out, and with the Dow hovering slightly above 16,600, we're only slightly higher than when we started at around 16,460 on Monday.

All of this stuff is easy to report—anybody would have figured out all the crap in the above paragraph just by googling the word "Dow" and clicking around. But what does this week's stock market loop-the-loop actually mean for us, the humans of America?

As I often do in times of crisis, I turned to my dad for clarity about all of this stuff. In addition to being the guy who taught me how to drive and the human that my mom saddled with the responsibility of enforcing my draconian 11 PM curfew in high school, my dad is also a certified financial planner with over 20 years of experience. He runs a successful practice in the small North Carolina town he and my mom raised me in, maintains a YouTube channel offering practical financial advice, has been quoted in the Wall Street Journal, and (along with me) co-wrote a primer on the financial multiverse for our Wall Street Issue.

In a nutshell, my dad's advice is this: whatever you do, don't freak out.

VICE: Hi, Dad! Can you explain the roller coaster of a week the stock market had?
My Dad: On Friday of last week, the US domestic stock markets took a big dive, largely because there was concern that China's growth is slowing. Not only is their growth slowing, but their stock market has been takin' it on the chin. It gained incredible amounts last year, something like 30, 35 percent. That's crazy for a stock market to gain that much. China had been encouraging that growth by encouraging people to borrow money and put it in the stock market. Their economic growth has been flying high for several years as a result. China isn't the largest economy in the world, but it's close. Their stock market going down is a big deal. So that spooked investors.

Really, investors were looking for an excuse to slow down this crazy market growth we've got here. We've been in a bull market since 2009, and investors were looking for an excuse to freak out. This was a great excuse! Things like this tend to become an emotional spiral, so on Monday the market plunged even more—a lot more. On Tuesday, as a lot of us anticipated, it took off on the upside to begin with, but it didn't hold for the rest of the day and lost a couple hundred points.

But on Wednesday and Thursday, it took off and started rising. What you're seeing is volatility. When markets are doing well and going up, it'll gain or lose 20 or 30 points a day. When people start freaking out, then the market starts going down, and when it goes down, it goes down fast. When we overdo it on the down side, then people's greed kicks in and they start buying stocks because they're cheap, and prices go back up quickly.

How big a deal was this week in terms of history?
The Dow lost 600 points on Monday. That was the eighth largest drop in history. From a points standpoint, that was really big. But you can't look at it like that, because it was starting from this really high level. It's around 16,000 right now. 600 points is nothing. If the DOW loses 600 points when it's sitting at 4,000, then that's something different.

What does "the Dow" actually mean?
The Dow Jones Industrial Average consists of 30 stocks of 30 different companies. They add those companies' stocks all up together, and they get a number that they use to quantify how high they are on average. It's just an artificial quantification. But it doesn't really mean a lot to be honest with you. The Dow and any indexes like it are basically artificial constructs.

When the Dow started in the early 20th century, it was just some number, like 15 or something—it was the value of a specific 30 stocks. As the Dow has grown and certain stocks have entered it and others have left it, that number has taken on a life of its own. The actual number doesn't really have any significance other than to show how much the Dow has grown since it started.

Is it wise to treat the Dow as shorthand for how the economy is performing?
No, but even people who understand the stock market sometimes do that. The economy and the stock market are two different things. The Dow isn't even a really good measure of the stock market. There are only 30 stocks, and they're all really big. The Dow Jones company selects the stocks that go in there very carefully because they want good, solid, strong companies. A better measure of the stock market would be the S&P 500, which has 500 stocks in it. Or the Russell 5,000. Gosh, what was your question?

Is the Dow a good shorthand for the economy?
No. The economy is a different deal. The economy is Gross Domestic Product—the GDP. It's the financial output of a country. The stock market is often considered a predictor of the economy, but it's not always a really good predictor of the economy. They call it a "leading indicator." In other words, if the stock market goes up, then people start thinking the economy will do well. But the problem is the stock market, by its very nature, wants to go up. People make money when the stock market goes up. You can make money when the stock market goes down, but it's a lot more complicated and a lot more difficult.

The vast majority of the money that's invested in stocks has a real vested interest in the market gaining. Investors—particularly traders—by nature, are greedy. That's not a negative thing to say, it's just the way it is. They want it to go up. That's why we overdo bull markets. If they really reflected the economy, when the economy would slow down the stock market would slow down. When the economy picked back up, the stock market would pick back up. But that's not how it works. The other thing is that stocks are like a school of fish. You'd think that each individual company would go up based on its own merits. There's a certain amount of that, but people who influence stock prices adhere to a herd mentality. It's a crazy thing.

When the stock market has a crazy week, should people freak out?
No. People should never freak out over the stock market. First of all, people need to remember that it's just money. Money only has importance insofar as it supports the major priorities in your life. If money becomes the major priority itself, you've got a real problem. The stock market going up isn't going to fix that. You can't freak out. Good decisions are never made in the heat of the moment. When the market goes down, one way to look at it is that stocks are on sale.

When you say, "Good decisions are never made in the heat of the moment," are you giving me financial advice as a money professional, or life advice as my dad?
It's me giving you advice in all areas of life.

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