Seeking Alpha
, LinkedIn (13 clicks)
Portfolio strategy, ETF investing, long-term horizon
Profile| Send Message|
( followers)  

Comparison between 1970s and Today

The following table and charts show that 1970s is the closest analogy to today's market:

Now

S&P 500

Then

S&P 500

2000 - 2003

-46%

1968 - 1970

-33%

2003 - 2007

89%

1970 - 1973

67%

2007 - 2009

-56%

1973 - 1974

-48%

2009 - Now

75%

1974 - 1975

47%

S&P 500 from 3/20/2000 – Today

S&P 500 from 11/25/1968 – 12/25/1975

After the big rebound from the September, 1974 lows, the stock market entered a trading range which finally ended in 1982. With such similarity between the 1970s and today, it looks like we are in 1976, instead of 1973. Should we invest in commodities such as SPDR Gold Shares (NYSEARCA:GLD) or iShares S&P GSCI Commodity-Indexed (NYSEARCA:GSG), and abandon S&P500 (NYSEARCA:SPY)?

Conclusion

According to Harry Markowitz, professor of University of California, all financial models are an attempt to describe an infinitely complex reality. As a result, to achieve any success at all, a portfolio theorist must make certain simplifying assumptions. These simplifying assumptions are generally true most of the time. The problem is that they are not always true. It is precisely at the point where the assumptions break down that financial models, pushed to their limits, lead to disastrous consequences.

There are several factors which affect the stock market's valuation. Among them, interest rates and P/E are certainly 2 of the most importable ones. In the 1970s, inflation was high and P/E was compressed. However, today we are in a historical low interest environment. In addition, 2010 has brought with it something we haven’t seen since 2007: investment growth. Businesses are investing in building their customer base and growing the top-line.

With limited downturn risk, equity might still be a great place to be for long term investors.

Note: Data is from Yahoo Finance and is valid as of April 9, 2010.

Disclosure: Long SPY

Source: Is Today's Market Like 1973 or 1976?