Not Seeing 1929 Today

While a chart comparing 1929 to now is unsettling, digging deeper reveals the risk is marginal, more subdued, and noise to disciplined investor.

A friend of mine asked my thoughts the above chart, which has been popular over the last week.  Naturally when you see our current stock market compared to 1929 that raises some alarm bells, but let me dampen some of those concerns (also see here and here):

1. Chart overlays are relatively common.  I see maybe 5 a week?  This one took off I would suspect given the 1929 comparison.  That doesn’t invalidate the chart, just shows that this isn’t the only chart overlay around. 
2. When looking at the chart, the first thing that came to mind was the scale (see below numbered bullets).  As Jeff Saut notes:  “You can ‘scale’ any chart to do just about anything you want it to imply! In this case, the scale makes the comparison to 1929 with the present stock market chart pattern appear eerie. However, if you index that same chart so that you are comparing apples to apples, the correlation to 1929 disappears.”
3. For arguments sake, let’s say this isn’t just a coincidence and that the market does follow the path implied by the chart.  The 1929 fall was about 50% per the chart, when scaling to today that fall would be almost 20%.  So while it would indicate a bear market, a properly diversified portfolio with some risk control parameters would certainly weather this storm.
4. The 1929 crash was after a near 10 year bull market.  We are 5 years into this bull market and I would guess the euphoria in 1929 dwarfs the enthusiasm for stock now.
5. The 1929 crash was also after a massive leveraging up.  We are currently deleveraging or maybe bottoming there, but certainly not in ramp up mode.
6. Totally different monetary systems.  We were pegged to Gold then and have a fiat currency now.  This means the Fed can create liquidity during market stress if they see fit, which could (and has since 2009) put a floor on the drop.

Is there anything to the chart overlay?  Probably not.  It could be coincidence or perhaps the author was looking for confirmation bias (searching for evidence to support his claim).  While I do think investor behavior tends to rhyme (not repeat), I just have a hard time seeing that in this chart.  And at least on the positive side this is a good reminder there is always risk in the markets.

Hopefully investors didn’t react emotionally to the chart as since it came out the S&P had a nice snapback and is close to flat for the year.  Nothing about the latest pullback indicates there will be a sustained fall in the markets, but if that proves to be false and the chart overlay comes to fruition a strategy to minimize drawdowns likely will prove more useful than the chart.

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