I hope you spend Labor Day weekend relaxing at the park, the pool or the beach. I know I will spend too much of it fending off questions from friends and family about when the stock market will finally recover.
With inflation still flaming and with U.S. stocks down 4% in August and 16% so far this year, lots of people suddenly seem to be asking whether we are in for a repeat of the miserable markets of 1966-82.
I don’t think so, but the best investors always consider the worst-case scenarios. And market scenarios don’t get much worse than the stagflationary period that began during the Vietnam War.
On Feb. 9, 1966, the Dow Jones Industrial Average closed at 995.15. On Aug. 12, 1982—16 ½ years later—the closing value of the Dow bottomed at 776.92.
That 22% decline doesn’t include the positive effect of reinvested dividends—but, in those days of high brokerage commissions, most people didn’t plow their dividends back into more shares.
Worse, inflation averaged nearly 7% annually over that period. Investors in stocks and bonds alike lost ground against the relentless rise in the cost of living.
Stagflation—in which economic growth stagnates while inflation runs hot—is merciless. Researchers at Robeco Institutional Asset Management in Rotterdam recently found that from 1875 through 2021, stocks lost an average of nearly 17% annually, after inflation, during stagflationary periods.
We need to realize, though, that when we look back at the past, we don’t recapture it; we reconstitute it. We turn it into something it never was: clear from the start.
The stagflation of the past, so obvious to us now, was ambiguous then.
The rate of inflation fell sharply in 1971-72 and again in 1975-76 before going bonkers in 1979. Economic growth was flat in 1970; it went negative in 1974 and 1975 and again in 1980 and 1982, but exceeded 4% in five years of the 1970s.
The term “stagflation” didn’t even appear in The Wall Street Journal until April 1973 (although it was evidently coined by a British politician in 1965).
Like a funhouse mirror, hindsight distorts other facts.
Knowing today that the price of oil exploded over that period—crude went from under $3 a barrel to more than $39 between 1966 and 1980—you might expect that the energy industry dominated the list of the best-performing stocks of the time.
Sure, a few, such as Texas Oil & Gas Corp., Southland Royalty Co. and Gearhart Industries Inc., were among the top performers.
The single-best performing stock between early 1966 and late 1982, however, was Tandy Corp. (later known as RadioShack Corp.). According to the Center for Research in Security Prices, Tandy returned 14,175% over that period.
The second-biggest winner? O’Sullivan Corp., a plastics manufacturer that also made rubber shoe heels, returned 4,820%.
Not far behind were media and entertainment giant Harcourt General Inc., up 3,196%; theater, tobacco and insurance conglomerate
, up 3,190%; and retailer
House of Fabrics Inc.,
Among those biggest winners, only Loews is still publicly traded, although a few stocks lower on the list of top performers, including
CVS Health Corp.
(up 2,005%) and
Altria Group Inc.
(up 1,738%), still exist.
CVS, however, wasn’t a huge drugstore chain then. It was part of Melville Corp.—the second discount footwear and apparel retailer, along with Scoa Industries, near the top of the list.
Most of the companies that turned out to be the “superstocks” of this stagflationary period don’t seem to have had the ability to foist rising costs onto their customers without losing business.
That’s what professional investors call pricing power—and conventional wisdom says it’s what companies must have to prosper amid stagflation.
Certainly Altria Group, then Philip Morris Inc., had pricing power: Smokers generally don’t resist paying more over time for something they’re addicted to.
Also, products like tobacco and movies offer consolation in tough times. Alcohol and sugar companies did well, too.
Many other stars of that stagflationary time tell a different story, though.
Tandy’s TRS-80 desktop microcomputer was one of the first personal computers to hit the market. In a Wall Street Journal advertisement for the TRS-80 in 1978, Tandy emphasized its “affordability” at $599; by 1980, a far more powerful version cost just $699.
Between 1976 and 1982, Tandy’s earnings roughly quadrupled—not because it had pricing power, but because its business boomed in a stagnant economy.
Meanwhile, House of Fabrics, which sold sewing machines, textiles, “notions” and other cheap tchotchkes, also had little pricing power—but raked in cash anyway as consumers, reluctant to buy new clothes at ever-climbing prices, took to mending old ones at home.
Today, just about every brokerage and asset-management firm around is flogging the idea that stocks with plenty of pricing power are the panacea for stagflation.
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But the price you pay for pricing power matters—a lot.
The market has already sent such stocks to the moon. Healthcare companies
UnitedHealth Group Inc.,
which investment professionals widely admire for their ability to pass along price increases, are up more than 10% and 5% this year, outperforming the broader market by more than 20 percentage points.
Veteran investor Shelby Davis, whose New York Venture mutual fund thrived in the 1970s largely by buying cheap insurance and other financial stocks, says that instead of chasing the latest fad, “diversification is probably the best answer right now.”
He points out that insurance and bank stocks are again much cheaper than the rest of the stock market.
History never repeats itself exactly, but you’re more likely to defend against stagflation by buying what’s cheap than by buying what’s already inflated.
Write to Jason Zweig at email@example.com
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