Last week was the 40th anniversary of BusinessWeek’s infamous cover headline: ‘The Death of Equities: How inflation is destroying the stock market.’ The publication’s current iteration, Bloomberg Businessweek, reported it is still getting grief over the headline and subsequent bull market. In its defense, stocks trended lower for about three years after the magazine hit newsstands.
Since its 1982 low point, “The total return on the Standard & Poor’s 500-stock index … with dividends reinvested has been nearly 7,000 percent. Not bad for a corpse.”
Investors worried back in 1979, just as they do today.
At that time, the Federal Reserve was waging a war against inflation. Late in the summer of 1979, the annual average inflation rate in the United States was 10 percent. Homebuyers were locking in mortgage rates of 11.1 percent on 30-year fixed mortgages and feeling good about it as mortgage rates rose to 18.5 percent by October 1981.
Today, investors aren’t worried about inflation. They are concerned about the U.S.-China trade war, the pace of global economic growth, the influence of monetary policy, negative interest rates … the list goes on.
Recent stock market volatility reflects those concerns.
It’s possible we’re nearing the end of the longest bull market for U.S. stocks. Further inversion of the yield curve last week suggested recession could be ahead. However, it’s unlikely to arrive immediately. And with the possibilities of a China trade deal happening within the next year, we could see the economy get a boost, and along with it a prolonged bull market.
If a recession does arrive, remember economic downturns are temporary and are relatively short. The Great Recession lasted 18 months and it was the longest since WWII. Typically, a recession averages six to 16 months, according to the Minneapolis Federal Reserve.
Right now, there is reason to believe the U.S. economy still has some oomph. Barron’s reported, “The economy is obviously slowing, but not necessarily heading for recession. That means it is time for caution, not panic.”
Volatility can be your friend — if you are prepared for it in advance.