Investors are always looking for patterns and analogies from the past. Analysts look at a specific event today and then discuss how it is similar to a past period. We extrapolate from these cases to form an idea of what we may see in the future. We look at past rate increases and compare them to stock market changes. We look at past periods of inflation or unemployment and compare with interest rates. However, there is a problem that gets in the way; those darn facts of how data are collected.
The stock index of today is not the same as the index 10 years ago or 20 years ago. Tech companies represent the largest capitalized companies today. Decades ago, energy companies were the drivers. It is hard to say that the volatility or response to a macro event today is close to the response to the same type of phenomena from 20 years ago. We can calculate sensitivities, but they change through time. Beware.
The way we calculate inflation or unemployment have also changed. We know that in the case of inflation the basket of goods today is not the same as the basket in 1980. Narratives of inflation can be told, but detailed analysis of the past for trading is a different story.
Looking back on return data from 50 to 100 years should only be done carefully. We can see the numbers but that does not mean we know the numbers. Of course, the answer is to not avoid the work but to recognize the limitations.
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