That Viral Chart Predicting Another 1929 Stock-Market Crash? It's Absurd
Beware of fund managers bearing double y-axes.
By Matthew O'Brien
Humans are easily confused, especially by double y-axes.
Exhibit A: The chart above that's been making the rounds again. It shows how the stock market today looks—dun, dun, dun—just like it did in 1929. Hurry up and invest with the geniuses who first identified this spooky pattern before it's too late!
Except don't. Please don't. Double y-axes have their time and place, but too often they're the first, last, and only refuge of charlatans and cranks. That's because you can use them to make almost anything look like a pattern.
Suppose, for example, that you had some stock prices from a historic boom and bust. And then suppose that you had some other stock prices from a much, much smaller boom. Well, you can make them look identical if you use devious enough y-axes. All you need is a small range for the small boom, and a big range for the big boom—and voilà, you have a "pattern."
Here's what the chart would look like if you weren't trying to scare the bejeesus out of people. First, you index the Dow to 100 starting in February 1928, and see how much it changed in percentage terms between then and December 1929. Then, you index the Dow to 100 starting in July 2012, and see how much it changed in percentage terms between then and now. And finally, you compare those two percentage changes on a single y-axis.
Suddenly our "scary parallel" is neither scary nor a parallel. It's just two lines that look nothing alike. Eerie?