1970s Deja Vu All Over Again? With Mark Biller » Audio Archive » MoneyWise

1970s Deja Vu All Over Again? With Mark Biller


Christian talk radio with Rob West

August 16, 2022

Philosopher George Santayana is credited with saying, Those who cannot remember the past are condemned to repeat it. Is that what we’re experiencing now? It sure seems like we’re seeing many of the same economic conditions as the 1970s. We’ll talk about that with Mark Biller today. Mark Biller is the executive editor at Sound Mind Investing. Mark recently wrote an article for the latest SMI newsletter called 1970s Redux? about the similarities between now and the 1970s. So what are they? Here’s a short list: - Soaring energy prices. - Relentlessly rising inflation. - Slowing economic growth. - A stock market coming off a long period of impressive gains, led by a group of seemingly invincible growth giants. Big picture, the last significant pivot from a low-inflation environment to a higher-inflation environment was in the late-1960s. So it’s pretty natural that as today’s investors are dealing with this first inflationary surge in many years, they’re turning back to that late-60s/early-70s period to study the similarities. And as they do that, they’re finding there are a number of things in common. What does that mean for investing? The big thing that immediately jumps out to any stock market historian when you start talking about the 1960s and 70s is that the stock market basically flattened out for 16 years. The Dow Jones index was still at the same level in 1982 as it had been in 1966. Investors actually lost purchasing power over those years. Suffice it to say then, it wasn’t a great time to be a stock investor. The main point of the article wasn’t to say we’re for sure entering another period like that 1966-1982 period. Maybe we are, maybe we aren’t. The main point was actually to alert readers that these long pauses in the market aren’t as uncommon as you’d think. There’s a chart in the article that shows the performance of the stock market going all the way back to 1930. The chart shows that over the last 90 years, the market moved through several distinct bull, bear, and sideways periods, and each was quite prolonged at times. Between the really big bull market advances, like we had from 1982-2000, and again from 2009-2021, there were these uncomfortably long periods where the stock market just flattened out. That’s not to say there weren’t significant bull and bear markets within those flat periods. The 1966-1982 period we’re talking about had four separate bull markets and five bear markets. But at the end of all that, 16 years went by with the market ending at roughly the same level it started. The same thing happened between 2000 and 2010 we had two major bear markets of minus-50% each, but the total return for the decade was roughly flat. What effect do those periods have on investors? These secular bear markets, as these lengthy flat periods are sometimes called, are a scary proposition for investors to consider. Most investors today believe in buy-and-hold investing using index funds. Obviously seeing periods where the market flatlines for a decade or more isn’t great for that approach. But as we just talked about, the reality is we’ve had three of these long, flat plateaus in the last 90 years, so we have to at least consider the possibility we could run into another one IF we’re transitioning from a low-inflation environment to a higher-inflation environment. Thankfully, accepting the fact that these secular bear markets do come along from time to time doesn’t necessarily mean we have to worry about them. Mark Biller says we need to consider, or factor in these bear markets. But how exactly do we do that? Biller says there are two key questions that are going to heavily influence how a person views these market plateaus. The first question is how long is your investing time frame? A 40-year-old investor should react differently than a 60-year-old investor to the prospect of a decade of flat market returns. It’s clearly more of a threat for a retiree or near-retiree due to their shorter investing time horizons. But a decade of sideways markets is exactly what a younger worker should be hoping for because it’s a tremendous opportunity to load up on shares at reasonable prices before the next big secular bull market arrives and pushes stock prices higher again. And really, even for those about to retire, a decade of flat returns may not be quite as dire as it seems, given that most retirement time frames usually extend at least 20 years into the future. It’s not the best for those already in retirement, but they’ve at least had the benefit of a long recent bull market to prop up their nest egg values. The second question for living through an extended bear market is this: Are you simply indexing and needing the whole market to move higher for you to be successful, or does your investing approach allow for you to potentially still do well if some parts of the market are rising while the overall market is flat? That’s a more active management approach, which has fallen out of favor in recent years. But if we are returning to more of a 70s-like environment, it may be time to dust off some of the approaches that were successful during that period. One of the more interesting parallels of the recent market to the early-70s is the way investors in both periods fell in love with the famous growth stocks of the day. Everyone today knows the FAANG stocks - today’s tech darlings like Apple, Amazon, Google, and so on. Well, in the late-60s and early-70s a similar thing happened with the growth darlings of that era. They called them the Nifty 50 and they were often referred to as one decision stocks because the only decision was to buy, as investors never sold these. But by the end of the 1970s, most of the Nifty 50 stocks had lost 50% or more of their value and investors had moved on to favoring other stocks. It’s not a random coincidence that both of these periods set up this way. When interest rates are low and money is cheap, high-flying growth stocks tend to outperform. But as inflation rises, interest rates typically go up, which tends to favor old economy companies that make physical stuff. So, will the current market repeat the 1970s pattern? Nobody knows the answer to that question right now. Again, a big part of the answer will likely be determined by how persistent inflation is. There are smart people arguing both sides of that question, but the reality is nobody knows how the inflation story will play out over the next several years. But there are some interesting possibilities to consider here, including some areas of the market like commodities and energy stocks that investors have basically ignored for the past decade while everyone piled into tech stocks. And again, even if the next decade does resemble the 70s, it won’t last forever. Eventually, the flat period will end and we’ll get another secular, long-term bull market. Younger investors in particular should be excited about the opportunity to accumulate shares during the flat years anticipating that eventually a new bull market will push those share prices higher. It’s so hard to get our eyes off the day-to-day gyrations of the market. But when we pull back and look at these longer market cycles, it emphasizes to us why it’s worth trying to preserve our capital during bear markets like we’ve had this year. If we can figure out how to keep it carefully growing during any long plateau seasons we run into, it puts us in a great position to profit whenever the next secular bull market begins. If any listeners want to see the chart we’ve been discussing or learn more about how SMI is approaching these challenges, the article is called 1970’s Redux and it’s available to read at Sound Mind Investing. On today’s program, Rob also answers listener questions: ● When does it make sense to refinance your mortgage? ● What’s the best thing for a person turning 90 to do with an annuity?

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