by Sam Jones
It should be no surprise that the state of our financial and economic worlds are approaching perfect symmetry with the mid 70's.
In 1974, we saw unfathomable federal bailouts, massive bank failures (many more than today), nationalization of the Savings and Loan institutions that were "too big to fail", the final phase of a losing war in Vietnam, historically low interest rates and yes the bottom of a prolonged and painful period in stock market history dating back to 1965. At the depth of despair, we also had Watergate and Nixon's resignation. The Economist ran a headline in the Fall of 1974, "US Stock Market Going to Hell." Within one week, the markets bottomed and moved higher for 25 years.
For this discussion, I want to focus on the period between 1974 and 1982. Financial market academics know this period was one of the very deepest and toughest economic cycles next to the Great Depression in US history. During this period, hopeless indices were created like the Misery Index - which simply added the unemployment rate to the inflation rate.
Here's a list of several major events that marked extremes. Pay special attention to their timing and sequence because I'm going to map out a speculative investment plan accordingly.
1974: US stocks finally bottomed after peaking 9 years earlier in 1965; US bond prices fall; interest rates of all maturities rise steadily; gold and commodities embark on a long term uptrend; the economy continues to weaken. Real estate prices peaked in 1972 and are beginning to accelerate to the downside.
1975: Unemployment peaks at 9% but inflation begins to really accelerate, gold moves even higher, bonds begin to accelerate to the downside. Real estate prices fall another 10%. Misery index rises dramatically in 12 months, hitting 17%.
1976 - 1979: Unemployment rate declines slowly as federal programs attempt to put people back to work. Inflation is running very hot, breaking above 10% a year. Gold and commodities continue higher, bonds and real estate are in a steady decline.
1980: Misery index peaks at 20, 76% of which comes from inflation and the rest from unemployment. This is a dark moment in US economic history. Bond prices hit their lows, interest rates in double digits, gold hits a high, Real estate prices in a death spiral.
1982: Unemployment hits another peak as the economy buckles under massive inflation. Inflation finally begins to fall under Reagan. Remarkably, the S&P 500 is now 54% higher than at its ultimate low 8 years earlier in 1974. 1982 marks the beginning of the most robust period of economic growth and financial market appreciation ever recorded
The key points during this period are:
Stocks bottomed 8 years before the economy began to recover. Bonds and real estate suffered terribly losing 30-40%. Inflation ran wild as did commodity prices. If we are to repeat the past even marginally, I fear for the great many investors who are still clinging to real estate and bond investments as well as those who have recently divested completely from stocks and are likely to miss a very large portion of what gains are made out of these lows. Unemployment was high for American standards as well but remember, at its worst, 90% of our country was still employed in 1982. Today, 92% of our country is still employed.
