What do you remember about the 1970s? Having spent the entire decade of the 70’s completing my primary and secondary education, my focus was not really on the U.S. economy, the equity market or world events unless something directly impacted me. I do remember the summer that the only thing on daytime TV (yes all three channels) was the Watergate trial. I was also painfully aware of the rising price of gasoline, having purchased my first car in 1978.
When 1970 began, the United States was still deeply mired in the Vietnam War. On May 18, 1970, National Guardsmen fired into a crowd of students at Kent State University killing four. The U.S. economy was not doing great. In August 1971, President Richard Nixon ordered sweeping economic changes due to runaway inflation and a falling dollar. As Vietnam ended in 1973, the Watergate scandal exploded into our living rooms. The Middle East erupted into another wave of violence as the Egyptians and Syrians launched an attack on Israel during Yom Kippur, and the threats of OPEC (the Organization of Petroleum Exporting Countries) became a dinner topic. Did you ever wait in line for gasoline?
We have only brushed the surface of the news and are only through 1973! Let’s just hit some highlights: Runaway Inflation, Energy Crisis, The Cold War, Wage and Price Controls, Recession, Stagflation, Escalating Debt, Terrorism, and let’s not forget the 52 American hostages being held in Iran as 1979 came to a close. For those of you who were in Western Pennsylvania, your memories will no doubt include the collapsing steel industry and with it, the struggles of the local economy.
So what was happening in the U. S. economy and the equity market?
The U.S. economy was exiting a mild recession when 1970 rolled. However, in November 1973, the U.S. entered a much deeper recession that lasted until April 1975. Unemployment hit 9% May 1975. Prices soared. Rising prices were blamed mainly on rising oil prices, but during this time, the U.S. also went off the gold standard and printed more money. Less than five years later, the U.S. was back in a recession, actually a double dip, which began in 1980. The first dip lasted six months, but it was followed by a second and deeper recession in July 1981 that persisted until November 1982. This period experienced the worst quarterly decline of GDP since the Great Depression (that was until the 2008 – 2009 recession). Unemployment peaked at nearly 11% in November 1982 and remained over 8% until January of 1984. Our current recession saw unemployment peak at 10% in October 2009. It has declined to around 8% at present.
In regards to inflation, it had risen to almost 9% by 1973 and later reached over 14% by the 1980s. Mortgage rates skyrocketed to the high teens. Inflation during the current recession dropped to less than 1% by the end of 2008. Today, inflation remains normal at around 2%. Mortgage rates are at historic lows.
What about the U.S. equity market? For simplicity, we will use the Dow Jones Industrial Average (Dow) as our proxy. During the 1970 recession, the Dow hit a high of about 1,051 in January 1973, and then lost over 45%. The Dow then rallied from time to time, like in 1980 when it gained almost 30%, only to lose all the return by 1982. Basically, the equity market went nowhere for more than a decade. The current recession saw the Dow hit a high of about 14,164 in October 2007. Then due to the housing bubble, fell to around 7,552 by November 2008; a loss of over 50%. For the last three years, the Dow has struggled higher. Our current market, like that of the 1970s, has been going sideways for more than a decade. Can this type of financial destruction happen in a normal rhythm? (See graph below.)
Taking a 16-Year Breather (data updated from source to present)
According to John Bollinger, through history, stocks have gained and then flattened out in roughly 16-year cycles.
Our stock market has seen multiple long run ups followed by long-lasting plateaus. John Bollinger, founder of Bollinger Capital Management, says it is the market taking another “16-year breather” and would be on rhythm to end by 2014. John Ferris, founder of Max Advisors Private Management, believes the most likely reason is not as dependent on oil prices, inflation, or the government handling of the economy, but investors’ extreme love and extreme hate of stocks. Investors go from severely undervaluing stocks to severely overpaying for them in these long cycles.
So, why dredge up the bad memories of the 1970s? Those days are behind us, and in the case of Western Pennsylvania, didn’t the region practically reinvent itself? Yes, as did much of the United States. As I trundled off to college in the summer of 1980, the future did not look so grand. Some were even saying that the best days of the U.S. were behind us. Obviously, in 1979 when Business Week’s cover story was “The Death of Equities,” investors had all but given up on the stock market.
By the mid-1980s, the landscape of the U.S. economy had changed and the future was brightening rapidly. The financial upheaval that defined the 1970s and early 1980s was also the catalyst for change. Historically, when equity markets are beaten down, stock investors have made better returns if they have the patience and financial wherewithal to deal with the volatility and negativity. At the end of 1982, the end of the last 16-year breather, the Dow was hovering just over 1,000. By January 2000, before the most recent drought set in, it peaked at 11,723. Will we see that pattern repeat when this breather ends? No one can say with certainty, but I won’t be the one betting against it.
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