Scaremongers

There is an interesting bit of mathematical hocus-pocus currently making the investment rounds … comparing the U.S. stock market’s pattern today with that in 1928-29 ... the run-up to the stock-market panic and the great depression.  Here is the article in question (WSJ Marketwatch Story) and the chart that is used there to prove this (false) premise.  I have taken the liberty of reproducing its chart here in case you don’t want to follow the link: 

 

(Click to Enlarge)

The fallacy of this scary parallel is that it compares these two market moves on an absolute terms not on a percentage-change basis.  That is ... the chart-line for 1928-29 goes from around 200 on the Dow Jones Industrial Average (DJIA) to its peak of around 380 … a 90% move. The chart line for the current DJIA goes from around 12400 to peak around 16400 … a 32% move. In other words, to be truly comparable, the current market would have to reach 23560 on the DJIA (a 90% increase from 12400) to have a comparable percentage move as right before Black Tuesday in October, 1929. Thus we are over 7,100 points below where we would be if this DJIA frothy comparison were indeed valid.

I am quite surprised that the Wall Street Journal and Mark Herbert, et alia would make such a silly mathematical faux pas.  To present a valid graphic comparison between these two periods, Mr. Herbert should have plotted these two lines on a logarithmic scale which would have made the percentage movements equivalent.  I can't help but wonder why such scaremongering is afoot. Perhaps some of the hedge-fund money managers repeating this breathless warning had missed out on the market move last year and would like to have another shot at things?

Caveat emptor ... just because Herbert's DJIA analysis is flawed does not mean that the stock market is not due for a correction ... it is, after all, very often driven by emotion and not logic (just like our political system.)