Note that S&P index value for the current quarter is based on a moving average of closing prices, per Robert Shiller's methodology. While economists debate the relative importance of the factors that motivated and perpetuated inflation for more than a decade, there is little debate about its source. Ian Webster is an engineer and data expert based in San Mateo, California. In fact, there were more years of deflation than inflation. With commodity prices soaring, money supply growth exploding, and government spending surging, there is a palpable fear of a return to 1970s-style inflation. In the lead up to the 1972 election President Nixon wanted to assure the American people that they were safe with him. On an inflation-adjusted basis, and including dividends, large-cap US stocks lost 1.4% per year during the decade, according to data from business school NYU Stern. But its not like its a total disaster for stocks when inflation runs hot. This is a return on investment of 18,255.08%, or 10.39% per year. The 10-year yield and inflation lines represent the 5-year averages beginning with the each 5-year cohort shown, using monthly data as of 3/31/2021. Automated investing, professional advice or trade on your own. Obviously, those returns were lower on a real basis after accounting for the higher inflation. Remember- the Dow Jones Industrial Average opened in 1970 at 809 points. . Overall, inflation averaged 7.1% during the decade, although it hit double-digit levels in both 1974 and 1979. However, until recently, the expected boost to growth from the millennials has been dampened by the double whammy of the financial and COVID-19 crises. He replaced long-serving Fed Chair Martin with Arthur Burns in 1970. Inflation began ratcheting upward in the mid-1960s and reached more than 14 percent in 1980. In magnitude, the total increase in the price level as a result of the sustained spurt in peacetime inflation to the five-to-ten percent per year range in the 1970s was as large as the jumps in the price level as a result of the major wars of this century." 4 This is a return on investment of 18,255.08%, or 10.39% per year. Although we expect higher prices over the next few years, a return to that level of inflation is unlikely. If you used dollar-cost averaging (monthly) instead of a lump-sum investment, you'd have $17,779.38. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Tony DeSpirito, CIO of U.S. There is also execution risk. Essentially, they thought that by raising inflation by a percentage point from one year to another as a way to ease people into the higher prices of goods and services. Thats basically the long-term average over the past 90+ years. Union wages tended to keep pace with inflation and even non-union workers were routinely given cost-of-living increases. The DJIA, which was just above 800 . It's the memory of high inflation that seems to strike a nerve with investors. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. That could change in today's economy. When Nixon took office, he was eager to see the economy rebound. After losing 25% in 1973 and 16.8% more in 1974, Neff gained 54.5% in 1975 and another 46.4% in 1976. You can also see the high inflation rates that occured in the 1970s. From 1974 to 1990, gold . Note that data shown is the monthly average closing price. Consider a strategy in which $100.00 was invested in the S&P 500 over a period of no more than 24 months beginning in 1970. Fundamental Equities, joined The Bid podcast to share his perspective. Bloomberg or Bloomberg's licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. On Wednesday, November 2 nd, the FED held its "Federal Open Market Committee meeting" and made the announcement the market has been breathlessly awaiting. 2) Untying the . What do these two decades have in common? Change incl. Remember- the Dow Jones Industrial Average opened in 1970 at 809 points. Learn more about our services fornon-U.S. residents. For more information on inflation, see our U.S. inflation calculator for 1970. From the 40s through the 70s (and even until the current day, really) the global economy grew in leaps and bounds, which meant that the U.S. dollar was in high demand. No one knows how the combination of a pandemic and unprecedented government spending will turn out. Neff's 31-year record of beating the market by more than three percentage points annually is unrivaled. The US Federal Reserve's balance sheet has increased to $5.25 trillion dollars. Also, while the ratio hit its low around 2010 and is rising, it isn't likely to have anywhere near the impact on the economy that the baby boomer generation did. How to Hedge Against Inflation, For disclosure information please visit: https://ritholtzwealth.com/blog-disclosures/. This lump-sum investment beats inflation during this period for an inflation-adjusted return of about 2,299.45% cumulatively, or 6.21% per year. Bell bottoms, long hair, aviator glasses, and disco music were popular. The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc. Thus, the dividend amount payable is also impacted by variations in the inflation rate, as it is based upon the principal value of the bond. The S&P 500 went from a price level of 92 to 140 so three-quarters of the performance came from dividend payments. At the close of the decade in December 1979, the Dow was worth just 839 points- almost no gain. The main problem with this and other outlets' attempts to illuminate inflation's stock market impact is that, depending on the criteria you use, the results can differ wildly. As simple as that sounds, the curve can become extremely convoluted when other aspects are at play. Consider farmland, for example: according to the US Department of Agriculture, the average price of US farmland in 1970 was $137 per acre. When the economy grows more slowly than its potential growth rate, prices tend to fall. The stock market is a mess. For all these reasons, real wages have not risen much for workers in the bottom half of the income distribution, keeping a lid on aggregate demand relative to supply. Unfortunately policy makers in the 1970s often didnt have great intelligence about the cause and effects of inflation. Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Brokerage Products: Not FDIC Insured No Bank Guarantee May Lose Value, Charles Schwab Investment Management (CSIM), Benefits and Considerations of Mutual Funds, Environmental, Social and Governance (ESG) Mutual Funds, Environmental, Social and Governance (ESG) ETFs, ADRs, Foreign Ordinaries & Canadian Stocks, Bond Funds, Bond ETFs, and Preferred Securities, Environmental, Social and Governance (ESG) Investing. Since a stock's price . Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk. Juckes argued that a drift lower in the core inflation rate to about "3% or soseems far more likely than the series of higher lows and higher highs that defined the 1970s." (American prices . Rapid inflation typically spells trouble for stocks. In those days, baby boomers were entering their prime working and spending years. Today, unionization is low, limiting the bargaining power of labor. This means by 2022 you would have $18,355.08 in your pocket. This would result in a final amount of $17,779.38, including dividend reinvestments. The Nasdaq Composite . With the yield curve steep, bond ladders can make sense. That turned out to be a bad decision. All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. It eventually declined to average only 3.5 percent in the latter half of the 1980s. The dollar had an average inflation rate of 5.72% per year between 1969 and 1970, producing a cumulative price increase of 5.72%.Purchasing power decreased by 5.72% in 1970 compared to 1969. And when adjusted for inflation, stock market investors LOST about 49% during the 1970s. Treasury Inflation Protected Securities (TIPS) are inflation-linked securities issued by the U.S. government whose principal value is adjusted periodically in accordance with the rise and fall in the inflation rate. It is possible an inflation scare could spook investors but theres no clear sign of this from the historical data. The table below shows the full dataset pertaining to a $100 investment, including gains and losses over the 633-month period between 1970 and 2022. The S&P 500 fell more than 35% before hitting a bottom in mid-1970 before rebounding. I get it. Predictably, household formation is increasing and demand for goods and services is rising. As you can see, the ratio is considerably lower now than it was when I was sporting bell bottoms and aviator glasses. Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Inflation-Adjusted Data Incorporating inflation data to historical total returns and relative prices produces the following inflation-adjusted graph: As can be seen, the stock market was very profitable, in real terms, in the 1950 to 1965 and 1983 to 2000 periods. I'm not going to pretend to know what comes next when it comes to price levels in the economy. This lump-sum investment beats inflation during this period for an inflation-adjusted return of about 2,299.45% cumulatively, or 6.21% per year. In this video, I go over how stocks and other asset classes did during that time. Because inflation made the "discount rate" higher, the value today of the future $10,000 was reduced. Investing in emerging markets may accentuate these risks. Although I am told that disco music is making a comeback, I'm going to guess that's a fad that is likely "transitory.". , named for William Phillips, is an economic model that shows the relationship between unemployment rates and the rise of inflation. We offer highlights here. Here's why inflation was the real widow maker that caused this sideways environment in real terms: US CPI Urban Consumers YoY NSA (CPI YOY Index). But the following decades in the 1950s and 1980s saw extraordinary bull markets. Repayment at maturity is guaranteed by the U.S. government and may be adjusted for inflation to become the greater of the original face amount at issuance or that face amount plus an adjustment for inflation. The 1970's coined the term " stagflation ," which was a condition where the economy stagnates despite rampant Inflation. In doing so, the Burns Fed made the choice to allow inflation to rise. Inflation and the Price of Real Assets Matteo Leombroni Monika Piazzesi Ciaran Rogers Martin Schneider January 2020 Abstract In the 1970s, U.S. asset markets witnessed (i) a 25% dip in the ratio of aggregate household wealth relative to GDP and (ii) negative comovement of house and stock prices that drove a 20% It was a brutal time to be an investor in mainstream assets. That's when the term "stagflation" became prominent. S&P 500 Highs and Lows. The FED Giveth and the FED Taketh Away. Economist Athanasios Orphanides says that the numbers that lawmakers had were significantly off, specifically data relating to the rate of unemployment consistent with full employment. While the Arab oil embargo that began in 1973 wasnt the sole cause of inflation, it did create a shortage that caused oil prices to quadruple. From the 40s through the 70s (and even until the current day, really) the global economy grew in leaps and bounds, which meant that the U.S. dollar was in high demand. Doing this allowed Nixon to maintain low-interest rates from the Fed. OECD historical population data and projections, annual averages, projections 2015-2025. It was also a bitter lesson about what happens when policymakers bide their timefor political gain and whatnot. Over the next 8 days, the S&P rose back up 13.32% to 78.52 on 6/3/1970. Tony DeSpirito. The inflation data used is based on annual CPI averages. In the 1960s and '70s, many economists believed that you could stabilize the economy by lowering unemployment rates, which would be accomplished by slightly raising inflation rates from year to year. This kind of thing isnt a huge problem until people start trading their cash in for gold in large droves, but that only happens when inflation rises. U.S. Breakeven 10 Year (USGGBE10 Index). The graph below shows the performance of $100 over time if invested in an S&P 500 index fund. _________________________________________________________________________________________________________, 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000. There were no offsetting tax hikes or spending cuts in other programs to offset the spending. However, in 1965, the U.S. increased its spending on the war in Vietnam. Shutterstock High inflation was as much a part of the 1970s as disco and leisure suits, but a generation of Americans growing up since then have never worried about it. Capital gains are not exempt from federal income tax. The causes of the Great Inflation of the 1970s have been analyzed and debated ever since. This plays back into the misunderstanding of the Phillips Curve, in that many lawmakers believed that raising the rate of inflation would drive people to seek more gainful employment, thus lowering unemployment rates -- unfortunately thats not how things worked out. should read The Great Inflation and Its Aftermath, [a] timely history of how good political intentions stoked an inflationary hell in the 1970sand how only bold, painful action smothered the . Fixed income securities are subject to increased loss of principal during periods of rising interest rates. It bottomed out in about 2010. Inflation in the 1970s was amplified by oil embargoes that sent energy prices soaring, slowing the economy and feeding inflation. For those too young to remember, the Dow Jones Industrial Average, which was just above 800 at the start of the 1970s, had only advanced to about 839 by the end of the decade, an overall gain of. To some extent, it is already reflected in the sharp rise in the compensation investors are requiring for inflation risk. Price spikes post-World War II and the 1970s show how inflation can dominate stock market returns A protest against inflation in Chicago in October, 1973. Both decades experienced high rates of inflation (as you can see from the table above). Tax-exempt bonds are not necessarily suitable for all investors. Instead, the capital is invested over a period of time. For . Source: Bloomberg and Organisation for Economic Co-Operation and Development (OECD). In the early 1970s, the stock market slumped, unemployment rose and the United States found itself suffering from an inflation crisis -- also known as the "Great Inflation" -- that lasted a decade. Inflation's impact on tech stocks. How would a 1970's style inflation cycle impact US home prices? Over time, foreign banks took on more U.S. dollars than the U.S. had in gold, which meant that the U.S. couldnt maintain a one-to-one ratio for the two currencies. Ian earned his degree in Computer Science from Dartmouth College. For disclosure information please see here. In the case of the returns described above, the CPI in 1970 was 38.800 and the CPI in 2022 was 296.808. There are plenty of other structural changes that affect wage growth, such as the rise of the service sector, global competition, technological change, and educational gaps. This happens due to the fact that future returns will be worth less in real terms. But a few short months after the election, the inflation rates rose to 8.8%; theyd later rise to 12 and then 14% before the recession ended. The causes of the Great Inflation of the 1970s have been analyzed and debated ever since. Eight out of the 17 years were double-digit returns. As in the 1970s, the Fed is making the choice to let inflation rise today. How should investors navigate this tricky situation? A second key difference is the structure of the labor market. Returns include dividends. Source: St. Louis Federal Reserve FRED database, using annual data as of 2019. In 1971, President Nixon stopped foreign markets from trading in U.S. currency, and shortly afterwards the global economy moved off the gold standard, untethering the dollar from anything fiscally tangible and moving us into purely speculative territory. Your guess is as good as mine. Every month you'll receive 3-4 book suggestions--chosen by hand from more than 1,000 books. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. US Generic Govt 10 Yr (USGG10YR Index) and US CPI Urban Consumers Less Food & Energy YoY NSA (CPI XYOY Index). That was before the COVID-19 crisis hit. Despite all the talk about "re-shoring" and the imposition of tariffs, most of the imports to the U.S. are goods, with the prices set in a far more open and competitive global market than in the past. Stock market returns since 1970. What's Changing: Real, Inflation-adjusted Returns Will Be Lower. In which case, take the $9,600. You may hear more and more financial commentators predicting that with so much money injected into the system, there is a possibility that in the future we are going to see very high inflation. The 1970s provide a good example of the relationship between unexpected inflation and the value premium. At the close of the decade in December 1979, the Dow was worth just 839 points- almost no gain. that began in 1973 wasnt the sole cause of inflation, it did create, . Income investors may need to take some sort of risk to get yield. And even when inflation has been as high or higher than it is right now, the stock market has held up pretty well in the past. Robert Samuelson's The Great Inflation and Its Aftermath U.S News & World Report "Barack Obama . The era opened with the Kent State shootings, unfolded into Watergate and President Richard Nixon's resignation, hit a crescendo with the fall of Saigon, and ended with the Iranian hostage crisis. Moreover, the composition of imports has changed. It may fluctuate up or down. It's been a brutal year for fixed income, but that's not a reason to avoid bonds going forward. It's the 1970s. A better historical analogy than the 1970s for today's inflation problem is the reconversion of the U.S. economy from wartime to peacetime production after World War II and the Korean War. It wasn't until Paul Volcker was appointed chairman of the Federal Reserve by President Jimmy Carter in 1979 that the central bank made its move to squash inflation, despite the heavy toll it took on the economy. There are some similarities to today. "A noticeable portion of my cumulative outperformance," says Neff, "came in those two years alone.". He has worked for Google, NASA, and consulted for governments around the world on data pipelines and data analysis. He's now remembered as the Fed chair who caved to political pressure instead of the one who avoided a recession. Source: Bloomberg, using quarterly data as of 1Q 2021. For close to a decade few people want anything to do with stocks. Nearly one-third of the time, returns were more than 20% when inflation was the highest. Remember, returns are based on the average closing price across the entire month. I get it. Bureau of Labor Statistics Employment Cost Compensation Civilian Workers YoY NSA (ECICCVYY Index). Suffice to say, the 1970s aren't usually the first thing that comes to mind when we look back at the 2000s from today's vantage point. Key Takeaways Stagflation in the 1970s combined high inflation with disappointingly uneven economic growth. Demographics have changed. By 1969, consumer price inflation was running at more than 5%. This means the inflation-adjusted return is 2,299.45% as opposed to the original 18,255.08%. 100 Year Chart 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 10% 5% 0% - 5% 15% 20% -10% In order to keep the economy on track he fired Fed Chairman William McChesney Martin and put presidential counselor Arthur Burns in his place in 1971. More about me here. If you invested $100 in the S&P 500 at the beginning of 1970, you would have about $18,355.08 at the end of 2022, assuming you reinvested all dividends. Gold increased from $150 in 1974 to $350 in 1984, or 133%. As expected, Chairman Jerome Powell announced a hike of 75 basis points in the fed funds rate. Most importantly, the Fed appears prepared to let demand exceed supply without reacting. Source: Bloomberg Index Services Limited. Stocks and bonds are trading in almost the same pattern as they did in the 1970s because the economy is facing the same threat: inflation. Factors that affect an economy's growth rate include the supply of labor and the productivity of those workers. Currencies are speculative, very volatile and are not suitable for all investors. Together, the two oil price shocks of the 1970s caused the price of a barrel of West Texas crude oil to soar 11-fold from $3.56 during July 1973 to a peak of $39.50 during mid-1980, using . The impact of this is that higher interest rates will remove a large buyer of stocks from the market. It wasn't all frivolous, though. Under that agreement, the U.S. dollar was made the reserve currency and it was most closely associated with the price of gold. The index is prepared and published by the Bureau of Labor Statistics (BLS), a unit of the United States Department of Labor. The table below comes from two sources. Richard Nixon meets Elvis, Presley, 1970. . Sep 13, 2022. That means that while people were losing their jobs and the cost of goods were spiraling out of control, people werent able to pay for gas, so they couldn't drive their, , so they couldnt look for work. US stocks fell Thursday as data showed inflation-adjusted personal spending fell for the first time this year. It wasnt exactly. But one month later, it dropped again by -9.28% to 71.23 on 7/7/1970. (Although I confess to embracing the fashions of the era, I was never a disco fan.). Before getting into why the Phillips Curve isnt necessarily correct we have to understand what it is. Nixons plan briefly worked. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. The returns assume that all dividends are automatically reinvested. If you normally target an average duration consistent with a broad index, such as the Bloomberg Barclays Aggregate Bond Index, you might consider moderately reducing it. In recent years, the velocity of money has fallen sharply. It all depends on whether it stimulates demand to exceed supply. The current mood in Washington has shifted its focus to address the issue, but if Congress can't agree on a minimum wage hike, it seems unlikely that it will take more significant action. Daily data as of 5/6/2021. It was running at 6% in 1970. It is worth pointing out the 1940s and 1970s weren't exactly the greatest decades for the financial markets. I remember those times. . Adjusted for inflation, the $18,355.08 nominal end value of the original $100 investment would have a real return of roughly $2,299.45 in 1970 dollars. (Although I confess to embracing the fashions of the era, I was never a disco fan.) He judged inflation as the lesser of two evils. Pandemic relief payments and economic reopening have sent consumer spending up sharply. Sure, markets didn't move in a straight line. However, inflation has held mostly below 2% during that time. Economists use the "output gap" to capture this phenomenon. Automated investing, professional advice, or trade on your own. Simply put, the Bretton Woods Agreement is what put the global economy on the gold standard in 1944. The process of change, as far as investing was concerned, accelerated in the 1970s, although the U.S.stock market meandered through this decade of stagflation. The Federal Reserve also raised interest rates dramatically during that time. Strong growth averaging 7% and a low borrowing cost (3%) combined to bring our National Debt down from 109% of GDP in '47 to 28% by '70, putting to bed any fears of default. 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