Fear Tactics: Viral Chart Draws “Scary Parallel” Between Today and Period Leading up to Crash of ’29

scary parallel chartFor some reason (probably just because fear sells), a particular chart has been making the rounds of late. It draws a “scary parallel” between the recent performance of the DJIA and that of the same prior to the 1929 crash, implying that a significant decline is impending (maybe). Already just this month three analysts over at The Wall Street Journal’s MarketWatch have penned at least four articles inspired by the graphic (including this retort), after it first appeared in the McClellan Market Report in late November, and more articles than that have been posted since the start of December. What should you do about it?

Well, if you have a well-diversified portfolio of passive or lazy assets with low intercorrelations well-suited to your risk profile, time horizon, and personal wealth, then…nothing. The point here is not whether a significant stock-market decline is coming, or whether the chart is even valid (you’ll notice for instance the difference in scales between the two axes), or whether the underlying fundamentals are even the same today as they were back then. No, the point here is rather that with the right investment approach, you shouldn’t keep yourself up at night worrying about whether another one is on the way or not, nor should you be rushing off to sell all your holdings.

But first, let’s spend some time addressing the comparative “analysis” represented by this chart. As already stated, the scales of the axes on the left and right sides of the chart are completely different. When we normalize the scales by showing changes in relative percentage terms instead of absolute point terms, we end up with the following, put together by Bespoke Investment Group. Already, things begin to look a little less carbon-copy with less promise of catastrophe.

bespoke investment group redraws chart

What’s more, since the most recent financial crisis fully manifested itself in 2008, the Federal Reserve has undertaken extraordinary measures to prop up the housing market and economy in general to avoid further catastrophe, by:

  • Drastically slashing the fed funds rate
  • Buying the long end of the yield curve to suppress long-term rates, and hence mortgage rates
  • Employing the Primary Dealer Credit Facility (PDCF), geared towards extending credit in the form of overnight loans to what are known as “primary dealers,” including straight investment banks that have no retail banking operations
  • Purchasing asset-backed mortgage-backed securities (MBS)
  • Exchanging loans for collateral, including asset-backed securities (ABS), with financial institutions

These are just some of the tactics that have been utilized. Whether you agree with the efficacy of these measures or not, of special note to the discussion here is the slashing of the benchmark fed funds rate and the reality that the Federal Reserve has not, as of yet, begun to raise that rate. This is especially significant when one recalls that prior to both the Crash of 1929 and the recent Global Financial Crisis, the Fed had raised rates multiple times. For this reason, it might be more appropriate to compare the time period leading up to the Crash of 1929 with the time period leading up to the 2008 Financial Crisis. Currently, we are simply not there yet with respect to hiking rates.

We must also take into consideration that overlaying charts in this case proves nothing more than coincidence at best and intentional data fitting to an arbitrary time-period length at worst. Pattern recognition or data mining is an advanced, scientific endeavor, consisting of numerous methodologies requiring test after test to prove that any results obtained are even meaningful. The only thing this chart shows is that the Dow went up prior to the Crash of 1929 and that the Dow is going up now. That’s it. But the Dow has been going up for nigh on five years. This chart only shows a two-year period. What about the other three years? And after it went up for two years from 2009 to 2011, by the rationale propping up this chart, shouldn’t we have by now already seen catastrophe unfold again? Then, there’s that pesky little thing called hindsight. In retrospect we perceive a pattern unfolding but it is only a function of our manually selected vantage point.

With these details in mind, we turn our attention back to next steps. For better or worse, market crises should be familiar by now. Already in the 14+ years kicking off this century, we’ve seen the bursting of the tech bubble and loss of capital that ensued, followed by years of wild growth and crazy valuations across many different asset classes, followed by a catastrophic global financial meltdown that has now since been followed by years of wild gains in equities and certain other assets such as gold. The DJIA has put on almost 10,000 points since it’s last bottom in March of 2009. Think about that.

Now think about this: Most of the time, most investors fail at market timing. Period. If your strategy also relies on reading the tea leaves correctly, your prospects are not looking so good. We’ve entered the day and age where markets can crash from one minute to the next in intraday trading (think Flash Crash), let alone over longer time periods that may provide the exceptionally observant and well-informed with some slim hope of exit prior to disaster striking. If Joe Lewis, billionaire investor, international business owner, and one of the savviest FX traders in history, could be blind-sided by the financial crisis of 2008 losing over $1B by buying into Bear Stearns right before they collapsed, then we should all admit that we can be blindsided at any point as investors as well. The world has by now witnessed true financial black swan events. It is almost certain that another market crisis of some kind is in our future. However, only a fool would pretend to know the exact severity of a crisis or when it might hit. The catch is that the fool can always claim they saw it coming. To paraphrase a reader of one of the MarketWatch pieces, anyone can predict rain in the desert and they will one day be correct as it will come to pass eventually. To expand upon that, when it comes it can be ugly, flash floods and all. But that doesn’t make the fool a clairvoyant.

All the more reason to understand that if you harbor any doubts about whether your investment approach can weather a significant market decline, then go ahead and treat the circulation of doomsday prognostications as a bit of a personal wake-up call or a reminder to revisit your financial affairs. Have those honest conversations with yourself, not only about your willingness to take risk but also about your need and your ability to take risk. Reanalyze what your monetary holdings are earmarked for, what your investment horizon is, what your relationship is with debt versus savings, how diversified you really are, how intercorrelated your holdings are, and so on. Then, by all means, rebalance or even retool your investments. The absolute last thing you should do is go ostrich, selling everything off and burying your head in the sand. It should go without saying that buying into that latest and greatest “perfect investment for the next stock market collapse” is not recommended either.

It is true that some are arguing that the next market crash will be the mother of all market crashes, wiping everyone out. But look at it this way: In that case, that’s almost reason to not worry about your financial investments at all. At that point, if it truly is apocalyptic, we could be talking about the collapse of modern-day society as we know it, and then what you had invested in with whatever currency on whatever stock exchange will turn out to be one of the last things on your mind. The world may return to a barter or even tribal hunter/gatherer system. Better to avoid getting swept away by overly-emotional rhetoric and instead maintain your perspective and turn your attention to reasserting your investment laziness.