When I mention inflation to folks under 50, their eyes tend to glaze over. It is something many don't remember experiencing because the last bout we faced where it was in excess of 10% occurred in 1981.
I do remember those days, as well as the mid-1970s, at least through a child's eyes. Gas lines, certain products in short supply and a sense that all was not right with the world characterize the mid-70s for me in terms of economic awareness. The late 1970s and early 1980s bring back memories of long lines at the gas pumps as well as at the precious metals stores, and the ability to lock in double-digit CD rates for my college money, earned through newspaper delivery and lawn mowing.
These days the concerns are different, at least through my middle-aged lenses. There are too many to mention, but one focus is on the effect inflation is/will/could have on the markets. While you cannot view periods in the past and expect a similar outcome, I wanted to take a look back at the 1973-1982 period in terms of inflation and market performance; other than 1973 and 1974, I'd never studied that period.
The years 1973 and 1974, when the S&P 500 fell 14.66% and 26.47%, respectively, were the worst back-to-back years for the S&P 500 since 1930 (down 24.9%) and 1931 (down 43.34%). In terms of inflation, it jumped from 3.2% in 1972 to 6.2% in 1973, all the way to a ugly 11% in 1974. Not a good time for the markets, but a period to be well-aware of in terms benchmarks for what can happen.
Inflation cooled down from 1975 to 1978 and the S&P 500 had just one down year:
Year/Inflation Rate/S&P 500 Return
1975 9.1% up 37.2%
1976 5.8% up 23.84%
1977 6.5% down 7.18%
1978 7.6% up 6.56%
The biggest surprise for me in terms of market performance was the 1979-1982 period as inflation topped out at 13.5% in 1980, but ran at double-digit percentages for three consecutive years. For perspective, in terms of interest rates, in 1978 the fed funds rate ended at 10.84% and the Federal Reserve, led by Paul Volcker, pushed it all the way to 22% in 1980 before pulling it back to 13.125% in 1981 and 11.2% in 1982.
Year/Inflation Rate/S&P 500 Return
1979 11.3% up 18.44%
1980 13.5% up 32.42%
1981 10.3% down 4.91%
1982 6.2% up 21.55%
Without looking, I hadn't realized just how good the markets performed during the 1979-to-1982 period. That does not mean we will have a similar experience over the next couple years. So much is different now; the fed funds rate is currently 0.75%, and it does need to move significantly higher, but it pales in comparison to the levels of the 1970s and early 1980s. However, one huge concern that was not much of a factor in the 1970s and 1980s is the national debt, which now stands at $30 trillion. In 1974, it was just $475 billion; by 1982 it was $1.14 trillion.
While I can't draw any real conclusions as to how to apply our last big inflation years to the current situation, it at least might provide some historical perspective.
