Dual charts can be misleading but this one is revealing: S&P 500 vs. GDP. I posted the chart in Twitter after resurgence in cases of using the linear axis S&P 500 chart in scare tactics.
Chart of the month
This is a logarithmic axis chart that shows the growth of S&P 500 index and GDP (seasonally adjusted) since the 40s. Axis for GDP is not shown.
In my opinion the above chart is a good answer to those who claim the stock market is in a bubble and especially to counter scare tactics used in social media.
But why should anyone be involved in scare tactics? Usually those are frustrated permabears who think they can get a 5 to 10 handle drop in S&P 500 is they scare people in financial social media with a linear axis chart of S&P 500 index.
The top chart is the linear axis and the bottom the logarithmic axis. Long-term linear axis charts are useless; logarithmic charts show relative changes and correctly reflect the longer-term trend.
“But if I divide S&P 500 by GDP this proves a bubble!” This is a frequent claim.
If you are allowed to divide S&P 500 by GDP, then I am also allowed to divide 20-year percent changes of S&P 500 and GDP and I see no problem.
In fact, as I have argued in several other articles (example here), there is no bubble in stocks but the market trying to catch up still after the 90s uptrend and dot com crash. Many get it, some don’t but they make a lot of noise.
Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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