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How to survive the worst bear market of all time


In Tom Wolfe’s famous essay on the 1970s:The I-decade‘, he wrote of how Americans had abandoned common thinking in favor of personal wealth. “They took their money and ran away,” he wrote.

Actually, there wasn’t much money to take with you.

With the stock market spiraling downward, it’s natural to look back on other times of financial woes: the Great Recession of 2008-2009. The bursting technology bubble in 2000. The crash of 1987, let alone 1929 — and all kinds of mini-downturns and flash crashes in between.

The one that scares me the most 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 ended up going absolutely nowhere for 16 years (see below).

Dow chart

Dow chart

Forget lava lamps, platform shoes and Farrah Fawcett, for me this is what defined the era.

What was it like then? What can we learn from that time? And are we ready for a rerun?

Before we get to that, let’s take a look at the 1970s market. The most devastating view comes from looking at the Dow Jones Industrial Average. In January 1966, the Dow hit 983, a level it wouldn’t exceed until October 1982, when the Dow Jones closed at 991. The S&P 500 was almost as bad. After peaking at 108 in November 1968, the S&P stalled, then touched 116 in January 1973, halted again, and finally broke up in May 1982.

Why did the market go sideways for 16 years? Mostly it was rising inflation and interest rates. Monthly CPI climbed from 0.9% in January 1966 to 13.6% in June 1980. Meanwhile, gas prices went from 30 cents per gallon to $1. To combat this inflation, the Federal Reserve increased the Fed Funds Rate from 4.6% in 1966 to 20% in 1981. That was bad for the market because higher interest rates make future corporate profits, and therefore stocks, less valuable. This partly explains the market’s swoon year to date.

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American economist and Secretary of the Treasury for International Affairs Paul Volcker (1927 - 2019) (left) and politician and United States Secretary of the Treasury George P Shultz talk at the International Monetary Fund (IMF) annual meeting, Washington DC, September 26, 1972 (Photo by Benjamin E. 'Gene' Forte/CNP/Getty Images)

American economist and Secretary of the Treasury for International Affairs Paul Volcker (1927 – 2019) (left) and politician and United States Secretary of the Treasury George P Shultz talk at the International Monetary Fund (IMF) annual meeting, Washington DC, September 26, 1972 (Photo by Benjamin E. ‘Gene’ Forte/CNP/Getty Images)

According to veteran market analyst Sam Stovall, fears of repeating mistakes made in the 1970s are affecting the Federal Reserve’s current actions.

“The Fed told us it planned not to make the same mistakes as it did in the late 1970s, when they raised interest rates, then calmed down for fear of a deep recession, only to have to raise rates again. Stovall says. “What the Fed is trying to avoid is creating a decade of economic turmoil. They now want to be aggressive with the Fed fund rate and hold back inflation so that we have either a V-shape or at least a U-shaped recovery instead of one that looks like a big W (to quote from “It’s a Mad, Mad, Mad mad world’).”

Stovall, who started working on Wall Street in the late 1970s, was schooled by his father, the late Robert Stovall, also a noted investor and expert. (The Wall Street Journal did a nice piece about the two of them and their different investment styles.)

Jeff Yastine, who publishes goodbuyreport.com, points to some other unfavorable trends for stocks in the 1970s, noting that “many of the largest U.S. stocks were ‘conglomerates’ — companies that owned many unrelated companies with no real growth plan.” Yastine also reminds us that Japan was then on the rise, often at the expense of the US, and technology (chips, PCs, and networks) hadn’t had a real impact yet. All this would change in the 1980s.

Another factor was that the stock market was richly valued heading into the 1970s. At the time, a group of go-go stocks called the Nifty Fifty led the market. This group included Polaroid, Eastman Kodak and Xerox, many of which sold for more than 50 times the profit. When the market crashed in the 1970s, the Nifty Fifty was hit hard, and some stocks never recovered. I can’t help but think of the possible parallels with the FAANG or MATANA – also known as tech – stocks of today.

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It really looks like we’ve come full circle. Or so suggests legendary investor Stan Druckenmiller in a recent conversation with Palantir CEO Alex Karp. “First off, full disclosure, I’ve had a bearish bias for 45 years that I 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 caused this not only stopped, they reversed. So there’s a good chance in my mind that the market will be a bit flat at best for 10 years, sort of like this ’66 to ’82 period.’

Yaks. So what should an investor do?

Let’s take a look at someone who was steeped in the market at the time. “Well, first of all, I came into the company in 1965 as a security analyst,” recalls Byron Vienna, vice chairman of Blackstone’s Private Wealth Solutions group. “I remember it was a time when it was hard to make money unless you were a really good stock picker. But I remember making money. I remember building my wealth and buying some biotech stocks that were doing well. And some I have to this day.”

Now let’s go back and take a closer look at what happened 50 years ago. To begin with, it is important to note that the dividend yield of the S&P 500 average 4.1% from 1966 to 1982, so investors in the broader market got at least some income. (It was hard to read the return of the Dow back then, but in other periods it averaged less than 2%.)

So while the 1970s were a terrible time for investors, dividends mitigated some of the woes by allowing the more diversified S&P 500 to outperform the Dow 30 — something to think about. Unfortunately, the dividend yield for the S&P 500 is now about 1.6%: firstly because stock prices are high and secondly because more companies are buying stocks instead of dividends. However, I would expect returns to increase as companies increase payouts to attract investors.

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The Dow also looked a bit gray back then, with 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 in the 1970s. “Wherever the demand for the products and services has remained fairly constant,” Stovall says. “You still have to eat, smoke, drink, go to the doctor, heat your house, etc.”

For some companies, the 1970s were their heyday.

“The nice thing is that there were companies back then that were doing really, really well in that environment,” 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 1970s.”

Cyclical areas such as consumer discretionary and financials underperformed.

Some of today’s takeaways for investors are always true: Avoid both overvalued stocks and those of slow-growing companies. It can also pay off to own stocks that pay dividends and to diversify. And it’s worth noting that if we have some sort of replay of 1966-1982, stock selection may become more important than passive investing and index funds.

It wasn’t all darkness in the 1970s. The disco balls lightened up some supplies. You just had to look a lot harder to find them. That is also a likely scenario for the future.

This article was featured in a Saturday edition of the Morning Brief on Saturday, September 24. Get the Morning Brief straight to your inbox every Monday through Friday before 6:30 a.m. ET. Subscribe

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