A panic-inducing chart for stock investors

Two charts of the Dow

Every so often, a terrifying stock market chart does the rounds. The latest purports to show that since mid-2012 the Dow Jones Industrial Average (DJIA) has been mirroring the pattern seen in the same index in 1928-1929, implying that we are about to plunge off a cliff.

Pay no attention. For starters, it’s not hard to construct apparently eerie similarities between different eras. Dan Greenhaus of brokers BTIG notes that the S&P 500’s development after the 2011 debt ceiling drama looks a lot like the S&P in the run up to the 1987 crash.

But since that crash was briskly followed by the resumption of the 1980s bull market, that chart isn’t as likely to generate as big a buzz online as a supposed pre-Depression cliff-dive. Fundamentals differ between eras; for example, monetary policy is far looser than it was in 1929.

But the main reason to ignore this one is that it doesn’t compare apples with apples: the scales are different. The Dow’s move in the 1920s was far bigger in percentage terms. Look at both in percentage terms (the bottom chart) and the spooky similarity disappears. There are several reasons to be wary – but this isn’t one of them.

Merryn

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