On the first trading day of the new year, Jan. 2, 2020, the Dow, S&P 500, and Nasdaq indexes hit all-time highs. Given holdover optimism from strong equity performance in 2019, pundits suggested we’re headed into another “roaring ’20s.” Maybe so, but we’d best hope it’s not a reprise of the period from Jan. 1, 1920 to Dec. 31, 1929, which began with a deflationary slump!
Per inflationdata.com, “inflation in 1920 was a deflationary -1.55 percent.” The entire decade was a struggle to recover from the devastation and inflation engendered by WWI. When Warren Harding took office as the 29th president in 1921, prices dropped by over 11 percent. Harding died in 1923, succeeded by Calvin Coolidge. After Harding’s death, several scandals came to light, including Teapot Dome, a bribery fiasco involving oil leases at a military reserve, and an extramarital affair. In historical rankings, Harding often is rated as one of our worst presidents. Coolidge was a pro-business conservative who favored tax cuts and limited government spending, polices criticized as contributing to the Great Depression and crash that started in 1929. May the past not be prologue!
Noted inflationdata.com: “One of the primary reasons the 1920s are considered ‘roaring’ is due to F. Scott Fitzgerald’s classic novel, ‘The Great Gatsby,’ which illustrated the lives of the rich but did not reflect the everyday lives of the average family. It was a great time to be rich as tax rates were coming down and investors enjoyed a booming stock market.” History repeats. “The rich doing well while the middle class gets clobbered…” A sound bite from a Bernie Sanders or Elizabeth Warren rally?
While the new decade technically won’t begin until Jan. 1, 2021, nevertheless we start the next 10-year period with inflation quite low, with All-Items U.S. CPI at 2.1 percent and interest rates at low levels. On Jan. 2, the Wall Street Journal ran a series of outlook opinions from respected “bond gurus.” Low to negative interest rates may be damaging the economy, said the legendary Bill Gross. “Pension funds, insurance companies, and any financed-base structure with long liabilities are slowly being strangled because they cannot earn their assumed return.” Senior citizen savers aren’t happy with low returns, either.
Elaine Stokes, Loomis Sayles & Co. portfolio manager, opined, “We have to find a different way to spur growth. That might just be going back to good old fashioned spending. I’m in the camp that inflation is something we’re going to see in the next decade but not in the first half of it.”
Likely over the next 10 years is more government borrowing and spending ─ infrastructure, climate change initiatives, bailouts, benefit increases, “free stuff.” The mantra may be, “Damn the deficits, full speed ahead.” Inflation has been constrained by technology and changes in buying habits, but all trends run their course in terms of meaningful effect. Once the inflationary ball gets rolling, there’s a tendency to overshoot, perplexing the “wise men” who think they can micromanage our economy.
Two percent inflation could go to 3 percent, then 5, then… In April, 1980, U. S. 12-month annual inflation peaked at 14.7 percent. No one foresees a repeat of the inflationary 1970s, but your long-range investment planning should consider increased inflation and erosion of future buying power. We’ll also see ups-and-downs in stock, bond, and hard asset investment markets that accompany changing economic trends.
A number of prognosticators expect stocks and bonds to deliver below-average returns for the next five to ten years. What’s done well on autopilot, including tech-weighted big capitalization stocks that have propelled passive index investing for the last several years, may not fare as well going forward. Surveys of advisers show growing interest in increased allocations to active management, looking at less loved diversifications, including emerging markets, international stocks, value stocks and reliable dividend payers, small- to mid-cap stocks, micro-cap stocks, real estate. Diversification and personal risk-weighted portfolios will be more important as trends shift.
Writer and syndicated newspaper columnist Bill Vaughn, 1915-1977, wrote, “Some idea of inflation comes from seeing a youngster get his [her] first job at a salary you dreamed of as the culmination of your career.” Retirees, compare what you paid for your first car and for what you drive now. That’s inflation. Inflation is when your annual tax bill exceeds what you made in your first job. Stay alert!
Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-3553;email@example.com. 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.