In “The Me Decade,” Tom Wolfe’s well-known article about the 1970s, he discussed how Americans had abandoned collective thought in favor of individual prosperity. He stated, “They seized their money and fled.” There wasn’t really much money to take. It’s only natural to reflect on past financial hardships, such as the Great Recession of 2008–2009, at a time when the stock market is showing a significant bear market rally. The 2000 tech bubble broke. Never mind 1929, there was the crash of 1987, and there were many mini-downturns and flash crashes in between. (bear market Camdenton mo)
The decades between 1966 and 1982, or the 1970s, are the ones that fill me with the most fear. The stock market went up and down and up and down, but in the end, went absolutely nowhere for 16 years
Forget about Farrah Fawcett, platform shoes, and lava lamps; to me, this is what the era was all about.
How did things used to be? What can we infer about that period? And are we preparing for a follow-up performance?
Bear Market Camdenton mo
Let’s look at the bear market rally in the 1970s before we get there. The most shocking conclusion is drawn by examining the Dow Jones Industrial Average. The Dow Jones ended at 991 in October 1982, surpassing the mark of 983 reached in January 1966. The S&P 500 was nearly equally poor. The S&P index paused after reaching a peak of 108 in November 1968, then approached 116 in January 1973, halted once again, and eventually broke out in May 1982.
What caused the market to remain flat for 16 years? The major factors were inflation and rising interest rates. From 9% in January 1966 to 13.6% in June 1980, the monthly CPI increased. In the meantime, the price of a gallon of petrol increased from 30 cents to $1. The Fed Funds rate was increased by the Federal Reserve from 4.6% in 1966 to 20% in 1981 in order to combat this inflation. This was terrible for the market since rising interest rates reduce the value of stocks by decreasing expected business earnings. This helps to explain the bear market rally so far this year.
Veteran market analyst Sam Stovall claims that the Federal Reserve’s current policies are being influenced by concerns about making the same mistakes that were made in the 1970s.
The Fed has assured us that it won’t repeat the errors of the late 1970s when it increased rates but then lowered them out of concern about triggering a severe recession, only to have to repeat the process, claims Stovall. “The Fed is trying to stop a decade of bumpy economic growth.” In order to prevent a rebound that resembles a huge W (to use a line from “It’s a Mad, Mad, Mad, Mad World”), they want to be proactive with the Fed funds rate right now and control inflation.
The late Robert Stovall, a well-known investor, and analyst who began his career on Wall Street in the late 1970s schooled his son, Stovall. (The Wall Street Journal published a lighthearted article on the two of them and their different investment philosophies.)
Another adverse tendency for stocks in the 1970s, according to Jeff Yastine, the publisher of goodbuyreport.com, was that “many of the biggest US equities were ‘conglomerates,’ firms that controlled dozens of unconnected industries without a genuine plan for expansion.” Yastine further reminds us that at the time, technology (such as chips, PCs, and networking) had not yet had a significant influence and that Japan was frequently gaining ground at the expense of the US. In the 1980s, all of this would change.
Another aspect was the stock market’s high valuation at the start of the 1970s. Back then, the market was dominated by a collection of hot stocks known as the Nifty Fifty. Many of the companies in this category, such as Polaroid, Eastman Kodak, and Xerox, were sold for more than 50 times their profits. The Nifty Fifty was severely affected by the bear market rally of the 1970s, and several stocks never fully recovered. I can’t help but consider the similarities to the tech stocks of today, such as FAANG or MATANA.
We appear to have completed a circle. Or at least, that is what renowned investor Stan Druckenmiller said to Palantir CEO Alex Karp in a recent chat. First off, in the interest of full transparency, Druckenmiller admits that he has had to overcome a negative inclination for 45 years. “I enjoy the shadows.”
“When I think back on the recent financial asset bull market, I notice that it really started in 1982. And all of the forces that led to it ceased but also turned around. Therefore, I believe there is a strong likelihood that the market will, at most, stay flat for 10 years, similar to the period between 1966 and 1982.
What then should an investor do?
Let’s talk to someone who was well-versed in the industry at that time. First of all, Byron Wien, vice chairman of Blackstone’s Private Wealth Solutions division, remembers his entry into the industry as a security analyst in 1965.”I recall it being a time when making money was challenging unless you were an expert stock picker. But I do recall earning money. I can recall increasing my wealth and investing in several profitable biotech stocks. And I still cherish some of them.
Let’s travel back in time now and examine what transpired 50 years ago in more detail. One thing to keep in mind is that from 1966 to 1982, the S&P 500’s dividend yield averaged 4.1%, meaning that investors in the larger market were at least receiving some income. (Although it was impossible to gauge the Dow’s yield at the time, it has generally averaged less than 2%.)
While the 1970s were a bad decade for investors, dividends helped to offset some of the pain by enabling the more diversified S&P 500 to surpass the Dow 30. The S&P 500’s dividend yield is currently just approximately 1.6%, which is regrettable given the high stock prices and the increasing number of businesses who are choosing stock buybacks over dividends. However, I would anticipate a rise in the yield as businesses boost dividends to draw in investors.
With companies like Anaconda Copper (replaced by 3M in 1976), Chrysler and Esmark (replaced by IBM and Merck in 1979), as well as Johns Manville, the Dow Jones Industrial Average also appeared to be a little dated at the time (replaced by American Express in 1982).
Of course, certain equities performed well in the 1970s, including those of Altria, Exxon, and packaged goods firms. Wherever the market for the goods and services “remained quite stable,” according to Stovall You still need to eat, drink, smoke, visit the doctor, heat your house, and other necessities.
Some businesses reached their peak during the 1970s.
The good news is that some businesses fared extremely well in such settings in the past, according to Druckenmiller. “In 1978 and 1976, respectively, Home Depot and Apple Computer were founded at that time. Coal and energy firms also prospered in the 1970s, as did the chemical industry.”
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