How to survive the worst bear market of all time
Saturday, Sep 24
In Tom Wolfe’s famous essay about the 1970s, “The Me Decade,” he wrote about how Americans had abandoned communal thinking in favor of personal wealth. "They took their money and ran," he wrote.
In fact, there wasn’t much money to take.
Today, with the stock market in meltdown mode, it’s natural to look back at other times of financial woe: The Great Recession of 2008-2009. The bursting tech bubble in 2000. The crash of 1987, never mind 1929 — and all manner of mini-downturns and flash crashes in between.
The one that gives me the most dread is the long, soul-sucking slog between 1966 and 1982 — in other words, the 1970s. The stock market went up and down and up and down, but in the end went absolutely nowhere for 16 years.
Forget about lava lamps, platform shoes, and Farrah Fawcett, to me this is what defined the era.
What was it like back then? What can we learn from that time? And are we set up for a repeat performance?
Before we get to that, let’s examine the 1970s market. The most devastating take comes from looking at the Dow Jones Industrial Average. In January 1966, the Dow hit 983, a level it would not exceed until October 1982, when the Dow Jones closed at 991. The S&P 500 was almost as bad. After peaking in November of 1968 at 108, the S&P stalled, then touched 116 in January of 1973, stalled again and finally broke out in May 1982.
Why did the market go sideways for 16 years? Mostly it was soaring inflation and interest rates. Monthly CPI climbed from .9% in January 1966 to 13.6% in June 1980. Meanwhile, gas prices went from 30 cents a gallon to $1. To fight this inflation, the Federal Reserve raised the Fed Funds rate from 4.6% in 1966 all the way to 20% in 1981. That was bad for the market because higher interest rates make future company earnings, and ergo stocks, less valuable. Which in part explains the market’s swoon year to date.
According to veteran market analyst Sam Stovall, fears of repeating the errors made in the '70s are influencing the Federal Reserve’s actions today.
“The Fed has told us that it had planned on not making the same mistakes of the late 1970s, where they raised rates but then eased off out of fear of creating a deep recession, only to have to raise rates again,” Stovall says.
“What the Fed is trying to avoid is to create a decade of economic choppiness. They want to be aggressive with the Fed funds rate now and corral inflation, so that we have either a V shape or at least a U shaped recovery rather than one that looks like a big W (to quote from ‘It’s a Mad, Mad, Mad, Mad World’).”
Stovall, who began working on Wall Street in the late 1970s, was schooled by his father, the late Robert Stovall, also a high-profile investor and pundit. (The Wall Street Journal did a fun piece about the two of them and their distinct investing styles.)
Jeff Yastine, who publishes goodbuyreport.com, points to some other unfavorable trends for stocks in the 1970s, noting that “many of the biggest US stocks were 'conglomerates' — companies that owned lots of unrelated businesses without a real plan for growth.” Yastine also reminds us that Japan was ascendant back then, often at the expense of the US, and that technology (chips, PCs, and networking) had yet to make any real impact. All this would change in the 1980s.
Another factor was that the stock market was richly valued heading into the 1970s. Back then a group of go-go stocks dubbed the Nifty Fifty led the market. This group included the likes of Polaroid, Eastman Kodak, and Xerox, many of which sold for more than 50 times earnings. When the market crashed in the 1970s, the Nifty Fifty was hit hard, with some stocks never recovering. I can’t help but think of the potential parallels with the FAANG or MATANA — otherwise known as tech — stocks of today.
It really does seem we’ve come full circle. Or so suggests legendary investor Stan Druckenmiller in a recent conversation with Palantir CEO Alex Karp. “First of all, full disclosure, I've had a bearish bias for 45 years that I've had to work around,” Druckenmiller says. “I like darkness."
“When I look back at the bull market we've had in financial assets — it really started in 1982. And all the factors that created that not only have stopped, they've reversed. So there's a high probability in my mind that the market at best is going to be kind of flat for 10 years, sort of like this ‘66 to ‘82 time period.”
Yikes. So what’s an investor to do?
Let’s check in with someone who was steeped in the market back then. “Well, first of all, I entered the business as a security analyst in 1965,” recalls Byron Wien, vice chairman of Blackstone’s Private Wealth Solutions group. “I remember it was a period where it was tough to make money, unless you were a really good stock picker. But I remember making money. I remember building my net worth and buying some biotech stocks that did well. And I hold some of them to this day.”
Now, let’s go back and take a closer look at what happened 50 years ago. For one thing it’s important to note the dividend yield of the S&P 500 averaged 4.1% from 1966 to 1982, so investors in the broader market were at least getting some income. (Getting a read on the Dow’s yield back then proved difficult, but in other periods it has averaged less than 2%.)
So while the 1970s was a terrible time for investors, dividends mitigated some of the misery by allowing the more diversified S&P 500 to outperform the Dow 30 — something to think about going forward. Unfortunately the dividend yield for the S&P 500 is now about 1.6%: first because stock prices are high and second because more companies are doing stock buybacks in lieu of dividends. However, I would expect the yield to climb as companies increase payouts to attract investors.
The Dow was also looking a bit hoary back then as it included the likes of Anaconda Copper (replaced by 3M in 1976), Chrysler and Esmark (replaced by IBM and Merck in 1979 ) and Johns Manville (replaced by American Express in 1982).
Of course, some stocks like Altria, Exxon, and packaged goods companies did well back in the 1970s. “Wherever demand for the products and services remained fairly consistent,” Stovall says. “You still have to eat, smoke, drink, go to the doctor, heat your home, etc.”
For some companies, the 1970s was their heyday.
“The nice thing is, there were companies that did very, very well in that environment back then,” Druckenmiller says. “That's when Apple Computer was founded [1976], Home Depot was founded [1978], coal and energy companies, chemicals made a lot of money in the '70s.”
Cyclical areas like consumer discretionary and financials did not do as well.
Some of the takeaways for investors today are always true: Avoid both overvalued stocks and those of slow-growth companies. It may also pay to own dividend yielding stocks and to diversify. And it’s worth noting that if we do have some sort of repeat of 1966-1982, stock picking becomes more important perhaps versus passive investing and index funds.
It wasn’t all darkness back in the 1970s. The disco balls lit up some stocks. You just had to look that much harder to find them. That's a likely scenario going forward as well
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