Lies, damn lies and the stock market charts

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There is an interesting piece in the New York Times today about the historical chart that shows it took 25 years for the Dow Jones Industrial Average to recover after the 1929 crash. However, because the DJIA is merely a basket of 30 stocks that are supposed to reflect the industrial sector of the market, the index is only as good as the choices of companies included in the basket. For example, IBM was removed from the index between 1939 and 1979, a decision some have estimated caused the index to perform 1/2 of its potential had IBM remained in.

According to Mark Hulbert, the author of the piece, if you look at overall market performance after the 1929 crash, rather than at the 30 stocks in the DJIA, the chart tells another story: “An investor who invested a lump sum in the average stock at the market’s 1929 high would have been back to a break-even by late 1936 — less than four and a half years after the mid-1932 market low.”

Hulbert’s explanation of how this can be, underscores something I believe — and have experienced personally: The movement of the 30 stocks that comprise the Dow Jones Industrial Average does not necessarily reflect the ups and downs of the entire economy, much less the ups and downs of a specific geographic area, industry or individual.

The Great Depression was a period of economic deflation and massive unemployment, but it was not evenly distributed across the entire nation and entire economy. Furthermore, industries, regions and specific businesses and individuals can be wiped out in times of economic prosperity. In Florida, for example, orange growers can tell you the years that freezes occurred and how many growing seasons it took for them to recover. The textile industry of the south collapsed in the 1970s and has never recovered — and perhaps the domestic automotive industry may never, also. But regional depressions like Central Florida freezes and cheap foreign labor taking over the manufacture of socks do not bring down the entire economy at once.

I will never be able to debate the people who crunch numbers and select the set of crunched graphs that enable them to make claims that the entire U.S. economy will never recover from where it is today because of some systemic reason related to the way a butterfly flapped its wings in 1997. Home mortgages and bank consolidation and unregulated credit swaps made on the backs of napkins or any number of other factors can be used to argue that this downturn is unlike all others.

But this, also is fact: When you use statistics that measure something as massive and complex as the U.S. or world economy, you can never understand the prosperity or pain that is occurring with specific individuals at any one moment. The economy is down, but not everyone is feeling it like those in certain cities or industries. Likewise, when the economy recovers, there will be pain and suffering among individuals and groups who experience set-backs and tragedies unique to them.

Each of us has our own basket of reality that serves as the index charting our ups and downs.