Bad Stocks, Bee Gees and Bellbottoms

Kurt Brouwer March 27th, 2008

I saw this piece from the Wall Street Journal, which compared the past 9 years of stock market struggles to those days of yesteryear — the 1970s.

I don’t know about you, but for me the piece brought back unhappy memories of bad stock markets, forgettable music and regrettable fashion statements (some of them my own).

However, once my reverse nostalgia for that lamentable decade passed, I did take exception to the comparison, which I’ll get to in a moment. But first, here’s an excerpt from the WSJ piece, which may require a subscription or registration [emphasis added]:

Stocks Tarnished By ‘Lost Decade’ (Wall Street Journal, March 26, 2008, E.S. Browning)

Over the past 200 years, the stock market’s steady upward march occasionally has been disrupted for long stretches, most recently during the Great Depression and the inflation-plagued 1970s. The current market turmoil suggests that we may be in another lost decade.

The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds.

…Until last fall, many investors had viewed the bursting of the tech-stock bubble as a nasty but short-term setback. The market had resumed its upward march, reaching new highs in October. Then the credit crisis began weighing on stocks, as did the possibility of a recession. By March 10, the S&P 500 was down 18.6% from its Oct. 9 record close, nearing the 20% decline that signals a bear market. It has rebounded since then amid the Federal Reserve’s efforts to stabilize the financial system, but it remains 13.3% below its October record.

…Stocks also underperformed other investments during the 1930s and the 1970s. During both of those periods, stocks would rally strongly, only to fade. It took well over a decade in each case for stocks to move lastingly upward.

After the 1970s show ended, the stock market entered a long up market, which began in 1982. According to this piece, that bull market ended in 2000, but even so it was a very nice 18-year run. If this is correct, are we in for another strong market for stocks, once this present funk has passed?

First, we have the positive side from Professor Jeremy Siegel, who is best-known for his book Stocks for the Long Run (McGraw Hill 2002). But, the piece also quotes Yale’s Professor Robert Schiller who wrote Irrational Exuberance (Princeton University Press 2000):

Finance professor Jeremy Siegel at the University of Pennsylvania’s Wharton School has written about stock behavior back into the 19th century. During the past decade, he points out, the worst years were from 2000 through 2002, when stocks fell sharply. Although the S&P 500 has been inconsistent since then — rising strongly in 2003, then registering single-digit gains in 2004, 2005 and 2007 — he considers the bad times largely past. Other optimists agree.

…But Yale economist Robert Shiller, who predicted the market trouble in his 2000 book “Irrational Exuberance,” warns that the market still hasn’t shaken off its excesses. He and some other analysts think the latest volatility is a symptom of more trouble to come.

“I have to say that this isn’t a great time to be in the stock market,” says Prof. Shiller. “The housing crisis that we are going through is going to put a damper on the economy that is longer than a recession. I don’t see the stock troubles ending as quickly as many people are imagining.”

Historically, stocks rise about two years out of every three, for an average gain of 7% a year when controlled for inflation, according to Prof. Siegel. Stocks have shown gains for almost every 10-year period since 1925 — 98.6% of the time, according to Ned Davis Research…

I come down somewhere between the optimistic Professor Siegel and the pessimistic Professor Shiller (see Major Turning Point? — Robert Shiller). I agree with Siegel in that the U.S. economy is resilient and that stocks will rise again. On the other hand, I think Schiller is correct that the decline in home prices nationwide will have a long-term dampening effect on the economy and hence on corporate earnings.

This seems to me to be a time for patience and a time to remember that the past is not a perfect prologue for the future. For example, when I joined Merrill Lynch in 1980, gold and oil were hot because inflation had averaged 7% throughout the 1970s and it hit double digits twice in the 70s and again in 1980.

Stocks had what the WSJ piece called a lost decade and they were considered a laughable investment. Bonds were being crushed by Fed Chairman Paul Volker’s inflation-fighting regime and they would bottom out in a couple of years when long-term Treasuries hit a yield of 15%.

Yet, do we remember the 1980s for soaring gold or oil prices? No. We remember them as a great time to buy stocks and bonds. If you think of the 70s as a decade of bad stocks, the Bee Gees and bellbottoms, the 80s were completely different. In that decade we had very strong stock and bond markets and the advent of the leveraged buyout. It was a decade of booming bonds, stocks and big buyouts.

And, while stocks and bonds boomed, gold and oil both entered a very long period of falling prices. Gold only recently surpassed its previous high point which was set in 1980. Back then, there was also talk of $100 a barrel for oil, which just happened as well even though it took nearly 30 years.

In short, the recent past is not a good indicator as to what lies ahead of us in the financial markets. For example, as we were muddling through the real estate induced recession of 1990-91, who would have guessed at what lay ahead? Stocks performed very strongly for the next 9 years, but more importantly whole new industries and technologies were about to come into existence. AOL, Microsoft, Cisco were not exactly household names then. And, Yahoo or Google did not even exist.

As we struggle through this current financial funk, I believe it is also important to look ahead — not backwards. In fact, I’m confident that the next decade will be full of surprising twists and turns and I look forward to the challenge.

What about you? Are you looking forward to your financial future with apprehension and anxiety or with confidence?

Did you enjoy this article?

Trackback URI | Comments RSS

Leave a Reply