About the Author: rick bookseller He is chief risk officer and co-founder of Fabric. He is the author of The end of the theory and A demon of our own design.
We are seeing war, inflationand whispers of recession. We have markets on the brink in terms of price to shares and price to sales, even with the recent correction. Rates are turning the other way after a 40-year secular decline. Can history give us any clues as to what to expect here?
Unfortunately, the period with the greatest similarity to the current one is the 1970s, a decade with wars that led to commodity shocks, leading to inflation, followed by a recession, topped off with skyrocketing rates. And through it all, a sustained stock market downturn persisted after a period of “irrational exuberance.”
The result? As we go through this turbulence, the S&P 500 level in 1968 didn’t return for good until 1982. Those 14 years add up to more than a lost decade of stock appreciation.
Here’s a step-by-step of what was happening in the 1970s. See what you think relates to what’s happening today:
A blast at Nifty Fifty, the blue chips of the era. Many spotted P/E ratios north of 50.
Two geopolitical upheavals: the Yom Kippur War of 1973 and the Iranian revolution of 1979. (There was also the Vietnam War, of course.)
Two oil shocks that followed those interruptions. Oil was a much more critical commodity than it is today, and the price change was much larger than anything anticipated today.
Energy shocks helped drive inflation. Most memorable meme: President Ford’s 1974 WIN buttons, for Whip Inflation Now.
A recession followed which, combined with inflation, was difficult to manage with the monetary policy tools of the period that required keeping one foot on the brake and the other on the accelerator.
It all culminated in rates that skyrocketed. The US 10-year bond entered double digits in 1980, peaking a year later at over 14%. This led to a change in the monetary regime of the Federal Reserve under the chairmanship of Paul Volcker. (That would be like walking away from quantitative easing today.)
An important lesson from the 1970s is that events can come into play from different points, one after another, playing on the vulnerability created by the previous ones.
This is also a lesson from the dotcom bubble and the crash of 2008. These were not two events. They were the interaction and sequencing of multiple events, each one making the next worse. The Nasdaq initially fell about 30% without much movement in the S&P 500. Then the wind went out of the broader market, and the broader market dropped another leg down. Then came the earnings scandals at Enron and his friends, which caused another crash. Ditto for 2008. There were Bear Stearns, mortgages, banks and, before the dust settled, European credit issues.
I think of the 2000s as an episode of the TV show. House. A patient arrives with a mysterious ailment. As if that wasn’t bad enough, it eventually leads to another; one organic failure after another, which usually occurs just before each commercial break.
Those who did their financial planning in 1968 were greatly disappointed. When they arrived in 1982, they had a stock portfolio that hadn’t changed for a decade and a half. (Not to mention what happened to 30-year Treasuries they had!) The same thing happened more recently: we had a lost decade from 2000 to 2014. I mean, only in 2014 did stocks definitely rise from the levels they hit. in 2000. For long-term investors, the best advice is to stay invested and ride out recessions and market downturns, because stock returns are surprisingly stable over the long term. But in some cases, 10 or 15 years is not long enough.
Of course, we’ll never really have a repeat of the 1970s. Markets are dynamic; they don’t work in reverse. But as Mark Twain is said to have said, history does not repeat itself, but often rhymes.
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