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The 2008/2022 Stock Market Analogue

Lately I've seen the chart above making the rounds and warning investors that a stock market crash is looming. Notice that big drop in the black line? That was October 2008 - not a fun time to be an investor. And the blue line (2022) is just about there.

It's not the first time I've seen something like this. Stock market analogs, or charts comparing the market's price action over two different time periods, attempt to discern similar technical patterns that may repeat. Below I'll post another one that compares to the two biggest stock market crashes in history - 1929 and 1987:

Pretty similar, huh?

Unfortunately, purveyors of market analog charts often cherry-pick their results with the intention of finding an analog that will drive the most fear (or greed) in market participants. Analogs that may be just as similar, or perhaps even more similar, are left out of the discussion.

Indeed, let's allow to do a better analysis for us. First, they look at market returns in the highest correlated years to 2022:

You will indeed see the fall of 2008 in this list along with some other bad time periods. But you also see time periods with good returns going forward. Now look at what happens when they compare just the five HIGHEST correlated years:

WOWSERS!!! All positive a year out with a median return of 35%!!! Some data points even marked (or nearly did) multi-decade lows!

So, should we sell all our worldly belongings and buy stocks? By no means. But hopefully, you see my point. Just because the internet told you the market may have a strong degree of correlation with one time period doesn't mean it can't also have a strong correlation with another. And that other time period may lead to a completely different result.

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