Dow 8000: The Psychology of Round Numbers

How much does 8000 really matter?

When chaos reigns in markets, investors often fixate on certain levels --- usually large round numbers. The Dow Jones Industrial Average closed Wednesday below 8000, the first time since 2003. In a market that is already on edge, the psychological effect of breaking through that level could outweigh a rational reaction.

And experts on investor psychology say even the emotional response could cut both ways.

“For some individuals, they may see this as a floor for others it could create reason for panic. We will know tomorrow, which wins out,” says Brian Bruce, editor of the Journal of Behavioral Finance and chief executive of Hillcrest Asset Management.

But rationally speaking, the number has little meaning in terms of valuation or the traditional measures many professionals use. Companies’ earnings prospects, however bleak they may seem now, are still better than they were back in 2003, says Bruce.

Still, let’s face it: The markets are not exactly following logic these days. “As long as panic begets panic, we are going to continue to have problem,” Bruce adds.