Those born between 1970 and 1979 range in age from 41 to 50, a time when one is making critical decisions about security, family, career, funding for multiple demands, while thinking about concepts of financial independence and ultimate “retirement,” whatever that is. Approaching the milestone age of 50, for some reason you get more serious abut planning for major life transitions. However, investors, planners and advisers of all ages need to recall the tumultuous 1970s and early 1980s and the role Paul Volker played in restoring sanity and stability to a ruinous economy. There are lessons germane to your future.
Paul Volcker, who died Dec. 8, 2019, at age 92, became chairman of the Federal Reserve Bank at the behest of President Jimmy Carter in 1979. In a retrospective of Volcker’s long and storied career, the Wall Street Journal, 12/10/2019, pegged him as the man who “tamed inflation in the 1980s,” a crisis with roots in the early 1970s.
Do you remember President Gerald Ford’s 1974 WIN buttons — Whip Inflation Now? It was an attempt to combat rising inflation by encouraging personal disciplined savings habits.
Causes for rising prices were the subject of much debate. Nobel Prize-winning economist Milton Friedman (1912-2006) in his 1970 seminal work, “The Counter-Revolution in Monetary Theory,” wrote, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced by a more rapid increase in the quantity of money versus output.” In other words, too much money chasing too few goods.
When Richard Nixon took office in 1969, America was in recession, an economic retrenchment blamed on profligate deficit spending on the Vietnam War and Lyndon Johnson’s Great Society social welfare spending, a policy Nixon continued while agreeing to a major expansion in Social Security benefits. The Federal Reserve instituted easy money policies to spur full employment. Some of the blame for rising prices was attributed to a series of Arab oil embargoes in the late 1960s and early 1970s as energy costs skyrocketed and gas lines proliferated. Much of the anger over ever rising prices was focused on greedy Arabs and American business leaders, even union bosses for pushing for wage increases, but not the real culprit, easy money stimulation.
In March and April, 1980, 12-month annual inflation peaked at 14.7 percent. To tame runaway inflation that was “feeding upon itself,” the Fed under Volker constricted the nation’s money supply. The prime rate, the most widely used benchmark in setting mortgage and home equity lines of credit and credit card rates, soared to a record 21.5 percent, Dec. 19, 1980. (By way of comparison, the current prime rate is 4.25%). Rates for conventional 30-year mortgages rose to a record 18.45 percent in 1980 with 3-month CD rates peaking at 18.65 percent.
Hailed as one of the most capable and courageous Fed chairmen in history, in the early 1980s Volcker was distinctly unpopular and faced myriad protests, especially from hard-pressed farmers and construction workers. In the long run, despite the pain, he was proven right.
The inflationary 1970s was unkind to equity investors in general. In January, 1970, the S&P 500 index stood at 578.48. By January, 1980, it had sunk to 377.41 in the wake of the Fed-induced credit crunch midst corporate and business failures. By July, 1982, the index stood at 282.50 and BusinessWeek magazine with an Aug. 13, 1979, cover famously headlined “The Death of Equities: How Inflation Is Destroying the Stock Market.” By the summer of 1982 inflation had dropped to roughly 3 percent. Paul Volcker had won his war. Buying opportunities are hard to see midst carnage, but Mister Market wasn’t dead, and rising from a coffin, commenced a long bull run, hitting 2130.90 in May, 2000, just before the tech stock rout.
Investors faced recession with the collapse of tech stocks and a stock downturn from 2000 into early 2003, and another crunch 2007-2008, highlighted by the sudden collapse of Lehman Brothers, September, 2008. In September, 2008, the S&P 500 stood at 1371.64. On Friday the 13th, December, 2019, the S&P 500 closed at another record high of 3168.80. Year-over-year All Items inflation stood at 2.1 percent. A 30-year fixed mortgage, 3.85 percent.
The Fed in mid-December signaled a longer pause on potentially raising interest rates. We are in a Goldilocks economy, not too hot, not too cold. But we know creative destruction still reigns; the disruptors will continue to create winners and losers. Bull market runs tend to be longer than bear market interludes, yet two or three years of market pain can rattle your psyche.
With markets at all-time highs, it’s a good time to sit down with your adviser and match risk and reward with time frames and capital needs. Nothing lasts forever, not the good, not the bad. Happy New Year!
Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-3553;firstname.lastname@example.org. Securities & advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis is a registered representative and investment adviser representative of SFA, otherwise unaffiliated with Capital Insight Group. He’s a Gallup Certified Clifton Strengths Coach and Certified Exit Planning Advisor.