The “scary chart” fallacy

A “scary chart” has recently made the rounds of numerous financial analysts and news commentators. It exhibits what appears to be a disturbing parallel between the current U.S. stock market and the DJIA in the period (1928-1929) just prior to the 1929 crash. A article, for instance, warns that if the U.S. stock market follows the same script, “trouble lies directly ahead.” One version of the chart is the following (source: McClellan Market Report, via Matthew O’Brien):

So what are the facts here? Should investors dump their portfolios immediately?

The problem with this graph, like many of its

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The Mathematical Investor: A personal perspective by QJZ

[Editorial note: During the next few weeks, each of the editors of the Mathematical Investor will provide, in an essay format, some personal background explaining the origins of their interest and work in this area. This is a perspective essay by Qiji J. Zhu.]

Education and research

I entered college and started my academic career in 1978 after spending the last several years of the `cultural revolution’ in a farm. My graduate and post graduate research first started in control theory dealing with control systems modeled by ordinary, partial and stochastic differential equations in Zhejiang University, Hangzhou, Fudan University, Shanghai,

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