Sometimes I wonder if I should even bring up things that are potentially frightening and you may not even be aware of otherwise. Today is one of those times...but it involves cool charts and pretty pictures, so I'm going to go ahead. Over the past few months, an ominous chart has been making the rounds. This chart purports to show a striking similarity between the stock market over the past 18 months or so and the stock market leading directly up to the crash of 1929. You can see it in this recent Mark Hulbert article.
One of the primary objections to this chart is that the scales of the two series are totally different. The 1929 scale (right) is a move of over 100% (Dow 200 to 400). The modern scale (left) shows a move of less than 50% (12,400 to 16,400). Hulbert explains, "You can still have a high correlation coefficient between two data series even when their gyrations are of different magnitudes."
I'm not buying that explanation, and a modified version of the chart by Ryan Detrick — adjusted to show percentage gains rather than Dow points — shows why. Anyone leading with this second chart and trying to claim a parallel to 1929 would get laughed out of the room.
You may have heard the famous saying, "There are lies, @#$% lies, and statistics." This supposed "1929 parallel" appears to be the chart application of that saying. There are plenty of people in the investment world peddling fear, and this first chart seems to be a blatant attempt to do exactly that. From the moment this bull market began in 2009, there have been many voices saying an even worse decline is imminent.
Of course it's impossible to ever say something won't happen in the future, but we're five years out now, and that doomsday advice has been spectacularly wrong and very costly. People who sat in cash as a result of those predictions have missed out on a lot. Ironically, as this article points out, the very fact that there are still so many negative voices calling for the stock market's demise is actually one pretty good reason to believe this bull market isn't over yet. Typically, big bull markets end when everyone has been converted over to the optimist camp. That obviously isn't the case today, as there are still plenty of bears passing charts like this 1929 one around to their clients.