I remember the investment environment of the 70s as being a dismal place to be. It was like a rainy period that just seemed to go on forever. An awful lot of folks who had thought of themselves as "long-term investors" caved before it ended.
Does anyone know how much of a percentage decline the SP500 experienced during that period of economic contraction? Something tells me it was greater than the current drop (so far).
-HW "Skip" Weldon Columbia, SC
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The S&P 500 went from 92 to 107 in that decade. It was 65 about September 23, 1974.
-- Ron
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1973 = 118 (the high for the decade)
1975 = 73 (the low for the decade) = 38% decline
1981 = first time S&P climbed to 1973 levels
As far as investments are concerned, I would not measure economic contraction by stock indices such as the S&P 500 as much as I would consider inflation and dividends. Inflation was high, as you recall.
ended up more than doubling. This represents roughly a 6% annual growth rate of dividends. It was not enough to keep up with inflation but it seems not so bad either, at least from where I am sitting, especially since one's personal inflation index may differ quite a bit from the conventional one.
About a month ago I began to think that today's calamity resembles the
1930s more than it does the 1970s. The 1930s collapse was based in too much credit. When it became clear that the credit was not going to be backed, people lost confidence. We then saw the ultimate horror, bank runs. The house of cards fell and the economy slowed, people consuming less, companies cutting payrolls, people consuming still less, and so on in that vicious cycle. I think it more likely that dividends will decline a lot in the next few years, like the Depression. Dividends fell by roughly half in the 1930s.
The better news is that inflation is likely to decline, too.
I remain a long-term investor, because the machinations of the economy make sense to me. It is not all going to become worthless. I own companies, and they have value with their assets. Until a few weeks ago, on a few stock positions I was even taking some gains and buying some other, large company stocks. Now, like many others, I am not making any move (though I am awaiting a $10k CD to come due in a month and then may buy more stock). Thank goodness I have been reasonably well diversified, with a nice pile of CDs and cash.
Lastly, like in 1987 I take the view that 60% or so of a lot of money is still a lot of money, and I managed the similarly wild gyrations of
2001-2002 as well. All of us who are retired with reasonable assets should go fishing and enjoy life.
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Which if you multiply out, a dollar goes in ends up at $1.75. I then looked at the inflation adjusted numbers and saw a total decade return of -20%. Ouch. A lost decade.
Joe
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I was a little kid during the 1970s and used to watch the evening news with parents every day at dinner. On the news, a screen with the Dow Jones movement that day would be shown for a few seconds before a commercial. I thought it was the "Down" Jones because it typically went down. I remember asking my parents at dinner, "why people invest in stocks when they usually go down? Are they crazy?".
Now I'm an adult who has read a lot about the "equity risk premium" and is one of those investors, and my wife, the investment amateur, is asking me the same question. It's not easy to give a convincing answer.
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To some extent, we are getting bank runs now. More in Europe than the US and more businesses than individuals. But when banks don't trust banks, how can we expect others to?
Yep, we're starting this, too. While the S&P looks cheap on a forward PE basis, the earnings estimates are way too high.
Consumer prices declined considerably in the 30's. I don't recall how much. The good news is that government mistakes like a balanced budget, shrinking money supply, and Smoot-Hartley are unlikely to be repeated. So I don't expect anything that long or deep.
We are likely to see a new set of mistakes. I'm not knocking Bernanke and Paulson, just noting that we are sailing unknown waters.
"This too shall pass". It was true in Solomon's time. It's true now.
[snip]
Us retired folks can sleep a lot easier if we've got several years' expenses in cash or near cash. I really feel sorry for those that don't.
For those of you still in the accumulation phase, these are good times. Really. There are good investments on fire sale. Keep dollar cost averaging in. You'll thank me in ten years.
-- Doug
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Here is the correct S&P 500 data from Yahoo Finance.
High of 121.74 on 01/11/1973 (high close of 120.24 same day)
Low of 60.96 on 10/04/1974 (low close of 62.28 previous day)
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This is an excellent example of the triumph of numerology over reason.
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One lost only if one got out. Those who reinvested their (growing) dividends, picking up stocks at bargain prices, did well.
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And then a fast 16+% increase in the space of a month or so, finally passing the '02 peak again in Jun '76, wandering around up and down by a few percent until in Apr '08, it passed the '02 peak never to fall below there again (only a brief dip below the '02 peak at the beginning of '08 - otherwise the whole stretch from early '06 to early '08 was above the '02 peak)
The recession started about halfway through the decline (end of '03) and ended just a little bit into the stock market recovery (beginning of '05). How that maps to where we are now in the market decline and the (likely) recession, well, that's speculation.
But the beginning and end of the recession do not correspond to the beginning and end of the stock market decline - the stock market decline began almost a year before the recession "officially" started and ended about 6 months before the recession ended.
[Data from Economagic.com]
Inflation adjustments make it a good bit uglier, of course. During the stock market's decline, inflation (CPI-U) ran at an average of 8% or so, bouncing around quite a bit, never really falling below 7% from '73 until early '75, dropping a bit, then really cranking into double-digits starting in '79.
Of course, there's always more to the story than just these numbers - what were the market fundamentals like? Corporate earnings and balance sheets? Global economy and political balance? It's interesting to look at the past, but it's hard to predict the future based on it.
This -20% would include reinvested dividends, and inflation factor. The $100 is worth $80 a decade later. Buying in during the period would add value, with the DCA effect, haven't done the math on that. Joe
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Comparisons to the 1930's and 1970's are perhaps flawed - we did not have the magic of hedge funds and risk models back then. This isn't an economic crisis, or even an economic problem, but a financial crisis. Perhaps hedge funds have figured that with fire-sale prices, they can drum up LBO clients, and continue their *one million dollar a day* take-home pay. As discussed on CNBC, we have developed a crisis in confidence. IMO, we don't need financial fixes as much as we need law enforcement.
That said, in 1987 the bid / ask spread on Franklin Resources was $11.50 / $18.00. I sold my shares. BEN recently topped out above $135. (My split-adjusted sale was below $2.) This, I learned, illustrates the complete idiocy of selling a great company in a crash just because a bunch of fools have panicked. (Kindly overlook my reference to myself there.) JNJ today closed at $57.58, down $4.78 (-7.67%) to yield 3.2%. It's recent high last month was $72.76.
It's too bad Greenspan hasn't come up with the counter-party to "irrational exhuberance", because today, ANYONE who buys gets accused of that!
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I ran the math on DCA using Shilling's data. From 1970-1980, I get a real, annualized return of -0.64%, compounded monthly. All things considered, I guess that's not so bad. The stark comparison to Joe's result also demonstrates the benefit of DCA.
I ran the same numbers on 2000-June 2008. I got 1.31%. Of course, that's before the recent fit hit the shan.
--Bill
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Er? Didn't you recently post about using money from a maturing CD to buy stocks?
-Will
william dot trice at ngc dot com
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You are going to have to rephrase your query, because I do not understand it.
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Sorry, upon rereading your post that I was responding to, I realize I misinterpreted it as saying that stock investment now is "numerology".
-Will
william dot trice at ngc dot com
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