We’ve Survived Worse Markets (and Economies) Before – the 1970s

 |  Includes: IVV, SPXL, SSO
by: Joseph L. Shaefer

It isn't the end of the world.

In a response to a commenter on my most recent SA article, I said, “I don't know what the market is going to do tomorrow. I can only rely on my experience, having been in similar situations a few dozen times over the past 40 years.”

I meant the situation of having a backdrop of bad news with a market, against all logic, climbing that wall of worry and still moving up -- like the weeks and months before the Crash of 87, the Asian Contagion, the Latin American credit debacle, Long Term Capital, and other problems too numerous to mention.

One reader, thinking I meant The Big Picture of the crossroads at which our economy stands today, took me to task and wrote, “I'm not being argumentative, but when exactly have you been in a situation even remotely like what we have now? The economy has fallen off the edge of the map, you know that one part that says ‘Beyond here, There Be Monsters’.”

A fair question. As I answered him, I was reminded that, for many people, this current experience is unique in their investing lifetime. For those investors, allow me to cite chapter and verse from a time that was remarkably similar – and from which we emerged stronger than ever.

I began investing in 1969, and entered the securities business after leaving the United States Army in 1972. What ensued was the best possible preparation I could imagine to survive and prosper in the current environment.

For 21 months from January, 1973 to October 1974, the market slid sickeningly, day after day with almost no respite, from 120 on the S&P 500 (a number that must seem quaint to younger investors, but the percentage carnage is what counts) down to 62 -- a 48% decline, similar to the decline we experienced in 2008-2009.

I hope what ensued next will not be a harbinger of what lies in store for this current rally. Because beginning in the fall of 1974, the markets “rallied” over the ensuing years. But “rallied” is a relative term. It took until March 1978 to rise a total of 26 points, to 88 -- 4 entire years of struggle just to rise 25%. By April 1980, more than 7 years later, it was only at 102, still down 27% from January 1973. April of '80 to August of 1982 it added a grand total of 1 point, to 103. Those were some very long years …

It took the election of Ronald Reagan and the diligence of Paul Volcker to shake off the lethargy and begin moving the economy forward. Still, the malaise they had to overcome meant it was a year and a half into their partnership, and 9 years and 8 months after beginning its slide from 120 in January 1973, when lower taxes, higher rates to reward savers, lower inflation and less intrusiveness from government finally kicked in, that the markets and the economy began to recover, roaring ahead (with the usual hiccups along the way) for some 18 years before another bear of any duration and amplitude began.

I spent 9 years and 8 months “before the mast” in a market that not only fell as far as the most recent slide but took longer to recover, and covered less ground, than this one has already. And yet, even in a drip, drip, drip Chinese water torture market, even in a chicken sideways market, there was ample money to be made by rotating sectors. Back in those unenlightened days, there were no index funds, no ETFs, and few no-load mutual funds, so it was incumbent on the investor who would be successful to pay very close attention to the three things I still review anew each day:

How should I allocate assets among asset classes, what is the optimal time to rebalance portfolios, and which sectors, industries and companies will do best this week, this month, this year?

As for my reader’s larger question about the economy, as bad, dismal, ghastly, appalling, horrible, abysmal, and terrible as things are right now, and as weak, ineffectual, feeble, inadequate, useless, and pathetic our leadership in Washington has been in recent times, the 1970s were every bit as bad or worse. Let’s look briefly at the geopolitical environment that often constrains or directs the economic situation.

Our only peer enemy in the time frame we are reviewing (1969-2009), the Soviet Union, was in ascendancy all over the world; we were losing our best and brightest in Vietnam; using Soviet equipment and relying on Soviet intelligence, Arabs once again attacked Israel in the Yom Kippur War; nuclear holocaust was a daily possibility; throwing a tantrum after Israel repulsed their sneak attack, OPEC established the oil embargo that created gasoline rationing and odd day / even day rationing in the US and around the world; Iran went from an autocratic pro-western to an Islamist theocracy and America couldn’t even rescue American citizens held hostage there; democracy marched backward all over the world as Marxist or autocratic coups toppled elected governments all over Africa, Asia and Latin America, with the most egregious resulting in as many as 3 million dead in Cambodia, genocide in Uganda, and “the missing” in Argentina; and terrorism (by Communists and anarchists like the Japanese Red Army, the Red Brigades and the Baader-Meinhof Gang) and terrorists (this time Islamic and Palestinian extremists) ran rampant, with bombings, kidnappings, hijacking aircraft, and murders being daily events.

If you think these were benign times, or somehow less dangerous times than today, you weren’t there. My point in recounting it is that it was as bad or worse as it is today -- and we got through it.

Economically, it was no better. The 1970s brought us stagflation, with inflation running as high as 13%+ and zero growth; the “official” unemployment rate was more than 12%; the prime rate was over 20%; we were more than ever dependent upon OPEC for oil; Japan's economic growth was #1 in the world, at that time surpassing the United States as the world's biggest industrial power; and nothing – wages, consumer confidence, raises, housing prices – nothing was keeping up with inflation. We were running faster and faster to get farther and farther behind. The thinking shared by nearly everyone was that America’s best days were behind us. The problems were too overwhelming to be solved. "Beyond Here, There Be Monsters" was the ruling belief. And yet we recovered.

So when people tell me this is The Worst, The Most Terrible Ever, or The Beginning of The Apocalypse, I usually just nod noncommittally and go about my business. I understand when things are this bad, people need to let off steam. And I understand the eternal mental struggle between recency and primacy: what has happened most recently always seems more alarming than something, with the silly certainty of hindsight, we now see as something we were able to muddle through.

That is why I will short individual stocks or ETFs for weeks or even months when I expect declines, but I won’t sell this country, writ large, short. West of Wall Street and Washington, we still know how to roll up our sleeves and get the job done. And I imagine we will do so this time, as well. We’ve previously seen an economy every bit as much “beyond hope”, a geopolitical environment more dangerous, stock markets more volatile, and politicians less gifted (OK, that last one may be a stretch), and with the luxury of time and distance we now see that all were surmountable.

Returning to my advice from that last article, of course I know unemployment is too high to allow the market to move higher. I agree that our government is printing and spending money like drunken sailors in port for this one night. Our politicians are merely politicians; there is not a statesman in sight. Wall Street is running roughshod over Main Street with the willing collusion of Washington, DC. The economy isn’t heading there, it’s already in hell in a handbasket. In the military, we describe this as a SNAFU. Then we do what we do whenever there’s a SNAFU – since a SNAFU is normal, we drive on and we do the job, anyway.

This is not a popular point of view right now. The articles on SA that get rave reviews and new followers are almost all "The Sky is Falling" articles. They may well be right -- but if they've been saying that for the past 7 months, they cost themselves and their followers some serious money! Of course, it's a proven fact in the newsletter business that if you advertise "Dow 2000!!!!" in your mailer you'll sell lots more subscriptions than if you say "Dow 11,000!!!" That's why horror movies do so well -- people love to be scared. We also love to believe in conspiracy when simple stupidity, greed and inattention are really to blame.

So, if you have watched much of this move since March from the sidelines but now want to stick a toe in the water, as I said in that article:

“Conservative investors might want to take a look at the iShares S&P 500 Index (NYSEARCA:IVV). For those confident that the above is the most likely scenario, you might consider ProShares Ultra S&P500 (NYSEARCA:SSO). And, for those with serious conviction and nerves of steel, have a look at Direxion Daily Large Cap Bull 3X Shares, with all the caveats articles too numerous to mention on SA have discussed regarding these 3x ETFs (BGU)…”

Author's Full Disclosure: We and clients for whom it is appropriate are long IVV, SSO or BGU.

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