The pesky chart that is blowing up the internet…
Sell all of your stocks….now! We’re about to see a crash! That’s what many people are thinking when they first take a look at the chart below, but investment advisors are begging you to do your research before you act irrationally.
There is much, much more to the story that what the uneducated person would think. This chart is a superimposition of the recent market performance and the crash of 1929. Mark Hulbert of MarketWatch defends the chart, saying that the market will face “a particularly rough period later this month and in early March.” One of the main objections to this chart is that there are different scales on the left and the right axes. “The scale on the right, corresponding to the Dow’s DJIA +0.79% movement in 1928 and 1929, extends from below 200 to more than 400—an increase of more than 100%. The left axis, in contrast, represents a percentage increase of less than 50%,” Hulbert says. But he goes on to say that this doesn’t discredit the chart. “You can still have a high correlation coefficient between two data series even when their gyrations are of different magnitudes.”
Hulbert wasn’t the only one defending the chart. Hedge-fund manager Doug Kass wrote about the parallels with 1928-29, saying, “While investment history doesn’t necessarily repeat itself, it does rhyme.” Kass believes that “the correction might have just started.”
Josh Brown of The Reformed Broker was far more skeptical in his post titled “The Chart That Wouldn’t Die.” (Link)
He goes straight into it saying that the chart has been debunked numerous times yet keeps showing up at any hint of correlation. Just like on TV, people like drama and emotion, and this chart enforces both of those.
“The studies all confirm that the human animal is, at the end of the day, more risk averse than it is ambitious. This is why content that frightens us can continue to get the traction it does, time after time,” Brown says.
Brown actually seems relatively pissed off at some points. “This frightens investors into making poor decisions – big decisions that will have a major impact on their mental health and financial condition well into the future,” he says. He also points out that the more charts like this are spread around and people fall for them, the more potential they have of becoming a “self-fulfilling prophecy.”
Now the Wall Street Journal has even stepped in (link). Steven Russolillo writes that we should all put an end to this drama. He interviewed several investment professionals and here are some of their responses:
“I have been in this business for over 43 years, yet I do not ever recall getting as slammed with the same email as many times as I have about the attendant 1929 comparison chart,” says Jeffrey Saut, chief investment strategist at Raymond James. “You can ‘scale’ any chart to do just about anything you want it to imply! In this case, the scale makes the comparison to 1929 with the present stock market chart pattern appear eerie. However, if you index that same chart so that you are comparing apples to apples, the correlation to 1929 disappears. Moreover, I have been around long enough to have seen this “act” before. The time period was the 1980s – 1990s when ‘they’ were trying to scale Japan’s Nikkei Index to that of the Dow Jones Industrial Average. All these kinds of chart shenanigans prove is that, ‘Where you stand is a function of where you sit, or that you can make numbers do anything!’”
Daniel Wiener, chief executive at Adviser Investments in Newton, Mass. told his clients in a note that he blamed the Internet for the ruckus this chart has caused. “Before the Internet these charts would never have seen the light of day, or if so they’d have been seen, and dismissed quickly,” Mr. Wiener said. “Not so today’s ‘eyeball seeking’ web sites that work hard to capture your attention whether they are selling snake oil or…snake oil.”
Despite this chart and a few bad days in 2014, the major indices aren’t doing so bad. They were nearing and sometimes entering pullback territory at points, but now they are close to turning positive for the year. It’s interesting to look at all perspectives, but make sure you are educated enough to separate the more accurate from the “far fetched ideas.”