This is a plot of log SP500 for the period 2/66-2/82, along with a time-shifted / log adjusted plot of log SP500 from 8/00-present. Both plots were aligned so they originate at what was then a local maximum, and show (not adjusted for dividends or inflation) what happened to stocks in ensuing years.

The first 10 years of these periods are similar as there is no "upward drift". During the recent 11 years stocks made three major highs and two major lows, whereas the similar (net/flat) period 66-77 had 4 major tops and 3 major bottoms. In addition to the recent period's less frequent periods, the peak/valley has been far less than the older interval.

Interesting also to consider other differences not shown on the chart, including results of US military action, inflation levels, bond yields, age of depression-era children, age of post-war baby boomers, evolution of the equity culture, widespread indexation, and globalization of economies and markets.

Stefan Jovanovich replies: 

Great stuff, Kim. My feeble model compares the present to the late 70s/early 80s. The difference is the world's Bond Markets, which are now the opposite of what they were during that period. Good credits are now as much overbought as they were oversold then. Gold's price is equally high because then people were hedging against cost-push inflation while now they are hedging against deliberate currency depreciation by the central banks. Back then the gold market was disappointed when further cost-push inflation failed to materialize after Reagan and Thatcher made it clear they were not going to give in to the unions. This time the fears of further currency depreciation will be disappointed as the electorates in the U.S., U.K. and Germany decide that they want the central banks to tear up their credit cards and drain the punch bowl. Gold will then have to compete with actual returns for CDs and other conventional savings. But, then, how can stock prices rise? The answer is that the cost of borrowed capital is now a negligible part of the overall expense of currently doing business and irrelevant to consumer demand. The promise of diminished regulatory and steady (i.e. no longer rising) commodity costs will offset the added costs of higher interest rates for businesses 10 or even 100 times over; and - miracle of miracles - there will be an increased consumer demand from the savers - i.e. the people living off the interest rates from CDs. This is, of course, exactly the opposite of the Fed's diagnosis that we need to somehow reduce lending rates further to "prime" the economic pump so the borrowers can go more cheaply in debt; but then, what would you expect from people who walk by Woodrow Wilson's statue every day without gagging.





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1 Comment so far

  1. Craig Bowles on September 13, 2011 3:54 am

    Fed Funds at the end of 1976 was also around 6% below the combination of inflation and economic growth as it is now(adding CPI and the coincident six-month smoothed growth rates together). That’s pretty crazy if you think 80bp is loose. A big difference is the lagging index then was still slightly negative and much weaker than the coincident index. Now we have an inversion where the lagging indicators are stronger than the economy (just like mid-2008). Fed actions support lagging indicators (i.e. debt, service inflation, etc). It’s a shame, because lagging indicators can often be inverted to make long leading. Generally, reward potential relative to risk is less favorable for stocks and metals when Fed drives the economy into inversion. One odd thing is that the grains often do well with favorable setups for bonds. Maybe it’s money moving out of other places or maybe growing conditions often accompany a struggling economy.


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