Sumer is here and the weather is beautiful in San Jose. The McCann clan has settled into a blissful summer routine. We had lots of family fun last quarter and are looking forward to a relaxing summer. As relaxing as things can be with two children under the age of three!
The markets have been relaxed lately as well. Every potential global upset has produced a “Meh, whatever…” from the stock markets as indexes repeatedly reach all time highs. Pundits, however, have no shortage of things to talk about. Is it just me, or does everything seem to have a partisan slant lately? You can get your liberal news, your conservative news or your funny liberal or funny conservative news. But you can’t just seem to get… news. Maybe I’m being nostalgic, but I just don’t remember so much of an agenda back in the Walter Cronkite, Tom Brokaw and Peter Jennings days. Which is unfortunate, because to be successful investors it is best to have a clear-eyed view of the investing landscape. Which brings me to my topic for this quarter…
Fun with Graphs
(Or: A picture is worth a thousand lies)
There has been a flurry of publications over the last several months linking our current market to the market crash of 1929. I’m not sure why this has cropped up. Perhaps people are worried because this bull market has been running for a long time (since March of 2009), or perhaps people are irritated because they missed such a strong rally. But for whatever reason, the doom and gloomers have been trotting out this assertion lately. For grins, I have reproduced my own version of this graph:
Panic! Dow Jones Industrial Average 2013-2014 compared to 1928-1929
Of course the publishers of this type of “information” know that we have a tendency to believe what we see; which makes this type of argument more convincing than it might be otherwise. (Geek note: the correlation of the two series is 0.85, which is roughly equivalent to the correlation of the divorce rate in Mississippi and Murders by bodily force). All of this is supposed to convince us of the wisdom of their view of an impending crash. Or it at least garner page clicks. Which article would you click: “2014 Market Eerily Similar to 1929 Crash!” or “Spurious Data Correlation of the DJIA Most Likely Meaningless”
The trick to making such a graph is to adjust the scales. In this case, I adjusted the 2013-2014 information to “stretch” it to make it look similar to the 1928-1929 data. It’s not similar at all, despite the relatively high correlation.
To illustrate this, I created a new normalized graph. This shows the percentage change of the index for each time period assuming the beginning value of 100. This is arguably the correct way to display the relationship:
Both scales are now equal. As you can see, at this point in the time series, the DJIA was up 50% in 1928 - 29 v. 26% for 2013 - 14. Also, the graphs don’t look scarily similar anymore. In fact, they don’t really look related at all. Another Bear market will almost certainly come at some point. But it won’t be caused because of some scary lines on a graph.
It pays to be a bit skeptical when you read financial news. Always question the agenda of the party presenting the information. And if possible, look at the source data yourself. You might be surprised what is shows you.
If you have any questions about this letter, feel free to contact me. Also, if any of your friends or family struggle with any financial matter, please feel free to make an introduction or forward this letter. We provide Financial Planning and Investment Management services and we would be happy to talk with your acquaintances. We will treat them with the same care and diligence that we treat you.
Brian McCann, CFP®
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