sankai
The history you don’t know may surprise!
We have been this way before… and it was much worse than anything we are experiencing today. I survived buying my first home in 1975 with a 9%, 30-year mortgage. My second in 1980 came at a much steeper price and mortgage… 11.5%, 7-year arm. We survived it and prospered, especially if you were invested in a diversified portfolio of common stocks, away from the high-multiple, one-decision stocks of the day (the “Nifty Fifty”).
History would indicate that the 1970s were much worse – yet, as inflation raged, the stock market did just fine.
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1974 |
1980 |
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CPI inflation (annualized) |
11.04% |
13.58% |
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10-yr UST yield: 1/1/1975-1/1/1981 |
7.5% |
12.57%* |
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S&P 500: 1/1/1975-1/1/1981 |
72.56 |
133 (+83%)** |
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* The all-time high yield on the 10-yr UST note was 15.82% (September 1981) |
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** The actual peak for the S&P 500 was 141.54 11/28/1980. The subsequent bear market low occurred 451 days later (2/22/1982) at 111.59, -20.59%. (Forbes.com) |
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Today, the trailing 12-month number on CPI inflation is 8.2%. The yield on the 10-year US Treasury note is 4.2% The S&P 500 is 3752.75.
Yes, inflation is high in relation to the 2% level we have enjoyed over the past couple of decades. This would seem to mark a secular change signaling the end to globalization. That 2% rate came at a price… jobs lost to inexpensive overseas labor and stagnant wage growth for our long-suffering middle class. It should moderate over time, but don’t expect it back at 2% unless we have a complete economic collapse. My sense is that Mr. Powell will moderate his stance long before that happens.
My question is, when was the last time your favorite media source mentioned these facts to calm your nervous heart? I personally can’t remember.
Despite the existence of factual evidence to the contrary, pessimism reigns supreme.
Why? The blame lays at the feet of the media. Most people don’t know the history, and the media does not know it or hasn’t bothered to check. Their business is engagement, and bad news sells. Since most people have had better things to do than study the market (many were not even alive in the ’70s), their reliance on the media keeps them scared and uninformed. This has lead to months of negative sentiment stats coming out of the American Association of Individual Investors (AAII). This page has their most recent sentiment survey and it can be used to look at the history of the sentiment surveyed over the years.
Blood in the Streets
The tech and innovation stocks (this generation’s one-decision stocks/”Nifty Fifty”) have been particularly hard hit. The group had run to extreme valuations. They were the cure-all during the early days of the pandemic versus those companies considered sensitive to the economy, which had been shut down. They have imploded as the Fed has been raising rates to fight inflation.
As to the blood in the streets, the music stopped on November 22, 2021. NASDAQ since then is down 31%, and the ARK Innovation ETF (ARKK), the poster child for “all tech, all the time”, was down nearly 80% at its low.
Interestingly, the stodgy old (tech-lite) Dow is only down about 10% from the 52-week high it hit on January 5, 2022.
Valuation is a plus!
Valuations are pretty attractive, with FAANGM [Facebook (META), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), Google (Alphabet) (GOOG, GOOGL) and Microsoft (MSFT)] stocks = 20% of S&P 500 market capitalization (at peak 24%)*.
The forward P/E on the S&P 500 at 15.5. Ex FAANGM = 15.1*
19.4 is the latest fifty-year average PE**. In 1900-1980, the average was 13.4***.
Again, the forward P/E on the S&P 500 is at 15.5, while the S&P 400 (mid-cap) and S&P 600 (small-cap) rest at 11.2 and 10.8 respectively.*
After similar love affairs with high-tech and high-P/E stocks in the “Nifty Fifty” era of the 1970s and the Tech “Bubble” of Y2K, mid-cap and small-cap stocks that languished during the period of tech domination took off.
These two areas should be fertile fields for investors going forward!
* Yardeni research ** Valuescope *** Finasko.com
Bottom line
We have been this way before, with high inflation and rates (only much worse), with blood in the streets, horrible sentiment and attractive valuations for a large swath of the market. It turned out to be a great time to be in the market (excepting old high-P/E leadership). Don’t let the media scare you out of your stocks or investing.
What’s your take?
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