In most instances, when an item makes it way through the Internet circuit, it’s an eye-catching video or an embarrassing photo. And, often as not, it puts a smile on your face.
Recently, however, a certain graph is making the circuit and it’s
nothing to laugh about. Like many people in today’s high-tech world, you
may work with graphs on a regular basis.
Or maybe you haven’t seen a graph since your high school economics
class. In my 16 years of writing this personal finance column, I know I
have never highlighted a graph.
So, what makes this graph so unique that I’m featuring it in a personal
finance column? Just the fact that it’s putting fear into the stomachs
of many investors.
The graph shows the ups and downs of the Dow Jones Industrial Average
Index (DJIA) from 1928 to 1929. But it’s overlaid with a graph of the
same DJIA fluctuations beginning in July 2012. What makes that scary, of
course, is that the two charts look eerily identical.
If we continue to follow the trend of the 1928-29 graphs, the next line
on the current graph will be severely downward. In 1929, that downward
movement ignited the Great Depression.
So, naturally, the chart with the two graphs has spread quickly. Bad
news travels fast and fear gets attention and nobody wants to see the
value of their life savings fall off a cliff.
I have always stated that nobody has a crystal ball into the future.
That being said, I’m a longtime subscriber to Investor’s Business Daily,
which runs numerous graphs every day that can be valuable tools in
finding stock market trends. And while they’re frequently accurate,
they’re by no means infallible.
Perhaps the current graph is correct and we’re headed for a severe
economic downturn. But I urge everyone to park your emotions before
panicking and making the next downturn a self-fulfilling prophecy.
Over time, markets always fluctuate. At some point there will be a
downturn. And when that happens, I don’t want to see people panic and do
something irrational with their nest egg because they fear we’re
falling into a Depression. A market decline doesn’t mean the economy is
about to collapse.
If you look at history, our current environment is much different than
the 1920s. The Great Depression was fueled by a debt crisis. Mom and pop
investors borrowed large sums against their stock portfolios in order
to buy more stocks. When the loans were called, panic stock selling
ensued. Today, there are limits on loans against stock accounts.
There was also a collapse in the banking industry back then. True,
today’s banks are far from perfect, but they’re much stronger than just a
few years ago. Plus, they now have to go through a stress test and have
to comply with a ton of regulations.
In the 1980s, there was a 20 percent tumble in one day. The anticipated
problems of Y2K turned out to be no problem. And, more recently, we
overcame the mortgage meltdown and near banking collapse.
Surviving those, I’m confident we can all survive the next pullback, and
I don’t believe it will lead to a Depression. History does repeat
itself. But this is one instance where I don’t believe it will.