The Punch That You See Won't Knock You Out

Last week FED Chairman, Jerome Powell indicated that they are not in a hurry to cut interest rates. This higher for longer message scared the market.

Because some of our clients and prospective clients started to compare this current market with the 70’s, I though it would be helpful to review how the market behaved back then to get clues of what kind of adjustment we will have to make this time around (if we even get to that situation).

I wrote a similar article last year, but I wanted to refresh the message. Boxers say that a knockout punch is the one you don’t see. For this situation, I would say is the punch you see won’t knock you out.

As a reminder, in the 70’s there was high inflation, rising interest rates, slumping economic growth and a very hawkish FED. Sounds familiar? All these factors contributed to a rather miserable decade for buy and hold investors. In the 1970s, the S&P500 index stood at 93 and by the end of 1979 it moved to 107.94. That is only about a 16% return over 10 years, or about 1.6% annually (before dividends). Adding insult to injury, inflation was approaching double digits at that time, so buy and hold investors lost big during that decade.

As evident by this chart, the market did not crawl by 1.6% annually during that decade. Instead it had a fairly remarkable degree of fluctuations. There was a big drop in 1973 and 1974 (about 50%) and a fairly strong rebound after that. They say that if there is a price move, there is an opportunity to make money somewhere, but the approach should be flexible and more active management will be needed to succeed in this kind of market environment. A buy and hold strategy is extremely powerful during rising bull markets, but if we go back to the 70’s style of market volatility we will have to be more active.

I also want to point out that not every area of the market struggled. The purple chart on the bottom panel shows the performance of a commodity index during that decade. While the stock market struggled, commodities had an 180% return (18% annually) in that period. I am not suggesting to assume that this time around commodities will automatically outperform as well, I am simply pointing out that it could be very helpful to broaden investment selection to search for opportunities. Especially during times of struggle.

This is where chart analysis can be extremely powerful. I am cautiously optimistic that we are not going to a secular bear market 70’s style, but if we do, I want to reassure you that I have tools and a process to navigate those markets. We will just have to be more active and explore less popular investment options to get the job done.