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Inflation Again: Is This the 70s All Over?

The 1970s was a defining decade for the global economy marked by challenges like high inflation, oil crises, and significant geopolitical tensions. These conditions often lead to comparisons with today’s economic landscape, which also faces inflationary pressures and geopolitical risks. However, despite these similarities, substantial differences exist that render direct comparisons less relevant.

In this piece, we compare and contrast the economic conditions of the 1970s with today’s environment and focus on monetary and fiscal policies, gold and currency valuations, oil and energy dependencies, and the broader economic and market dynamics including a comparison of the “Nifty Fifty” stocks of the 1970s and today’s “Magnificent Seven.”

Prices really became unhinged with inflation jumping during 1972-1974 around the first oil embargo, then rising again in the late 1970s with the second oil embargo before finally settling down with the early 1980s restrictive monetary policy environment.

In contrast, today’s environment is significantly different across several dynamics.

Monetary and Fiscal Policies

In the 1970s, the U.S. experienced high inflation driven primarily by expansionary fiscal and monetary policies, along with a weak dollar. The federal government engaged in deficit spending due to the Vietnam War and expansive social programs while the Federal Reserve (Fed) adopted an expansionary monetary stance that involved lowering interest rates and increasing the money supply to help stimulate the economy. These actions boosted demand for goods and services without a corresponding increase in supply, which led to inflation.

Today, we observe similar expansionary policies, especially in response to economic downturns, such as the COVID-19 pandemic. However, the scale and context differ significantly. Modern monetary policy is more nuanced with the Fed having a better understanding of inflation dynamics and more tools at their disposal to manage economic cycles. For example, in the 1970s, the Fed was focused on the now largely debunked Phillips Curve that closely ties inflation to jobs creation.

Gold and Currency Valuations

The 1970s began with the U.S. dollar pegged to gold at a fixed price of $35 per ounce. In 1971, President Nixon ended the convertibility of the dollar to gold, effectively terminating the Bretton Woods Agreement and allowing gold prices to appreciate and the dollar to depreciate, which contributed to further inflation. As a result, the price of gold soared past $500 an ounce by the end of the 1970s. This drastic change in the value of the dollar is an important factor in the price increases of the 1970s. Today, gold has been floating for over 50 years, and the historical pegging and subsequent unpegging to the U.S. dollar has a unique impact that cannot be replicated. The current environment includes a broader spectrum of gold buyers ranging from traditional uses by central banks and in jewelry to retail investors. Still, we believe that gold better acts as a hedge against uncertainty rather than a hedge against inflation.

Oil and Energy Dependencies

The oil shocks of 1973-74 resulting from the Yom Kippur War and the 1978-79 Iranian Revolution were pivotal events in the 1970s that led to oil prices skyrocketing and severely impacting the U.S. economy due to its heavy reliance on oil imports. In the 1970s, the U.S. imported approximately 60% of its oil. Today, the U.S. is the world’s largest oil producer and a net exporter of energy. This shift has significantly reduced its vulnerability to global energy price shocks.

Top Oil Producers in 2023

Additionally, energy costs in the 1970s were a much higher portion of household spending. Energy costs today make up about 4% of household spending, which is down from an average of 7% in the 1970s and well below the peak of nearly 10% in the early 1980s. Moves in energy prices today have a fraction of the economic impact they had in the 1970s.

Household Spending on Energy

Inflation Dynamics

Inflation in the 1970s was driven by both demand-pull (from fiscal and monetary expansion) and cost-push factors (from oil price shocks). Today, inflationary pressures are also present and influenced by recent expansionary policies and supply chain disruptions, but the underlying economic dynamics are different with technology and globalization playing significant roles.

Between falling money supply, the resolution of pandemic-era supply chain issues, and increased productivity driven by innovation, the U.S. economic dynamics and inflationary risks are far different than they were 50 years ago.

Stock Market Dynamics: Nifty Fifty vs. Magnificent Seven

The Nifty Fifty stocks of the 1970s and today’s Magnificent Seven illustrate how investment paradigms and market dynamics have evolved. The Nifty Fifty were a group of fifty large-cap stocks that were widely regarded as solid buy-and-hold growth stocks. They included companies like Coca-Cola, IBM, and Procter & Gamble, which had strong brand recognition, continual earnings growth, and were dominant in their industries. These stocks were known for their stability and consistent performance in both good and bad economic times, which made them extremely popular among institutional investors. This group flourished in a time of economic uncertainty and traded at extraordinarily high valuations, with price-to-earnings ratios often exceeding 50 times earnings due to their perceived “safe haven” status. The Nifty Fifty were seen as “one-decision” stocks where the only decision was to buy. The prevailing wisdom was that these companies would continue to outperform the broader market due to their strong fundamentals and market positions.

The “Magnificent Seven” could be likened to modern tech-heavy giants, such as Apple, Amazon, Google, Microsoft, Tesla, Meta (formerly Facebook), and NVIDIA, which dominate their respective fields. These companies are characterized by rapid growth, technological innovation, and have significant impacts on both the economy and society. They have a global reach and have been integral in driving forward advancements in technology, e-commerce, social media, and artificial intelligence.

Today’s market is shaped by digital transformation, globalization, and the aftermath of the COVID-19 pandemic, which accelerated trends towards remote work, digital services, and supply chain reconfiguration. These stocks have been beneficiaries of low interest rates, which have supported higher valuations for growth-oriented technology companies. Similar to the Nifty Fifty, the Magnificent Seven are often perceived as must-own stocks by both retail and institutional investors. They are considered central to growth-oriented investment portfolios, especially those focused on technology and innovation. However, concerns about overvaluation persist, especially as monetary policies tighten and interest rates increase, potentially impacting valuations that are predicated on future high growth rates.

The popularity of the Nifty Fifty faded with their stock price performance. Over time, the benefits of disciplined diversification shone through as other areas of the global financial markets took the lead. We think that we will see this type of market evolution once again.

Conclusion

While it’s valuable to draw lessons from the past, today’s economic environment is fundamentally different in terms of monetary policy framework, energy dependency, and global economic integration. These differences must be understood to navigate effectively and formulate strategies that reflect present-day realities rather than past scenarios. Recognizing that each era’s “winners” are products of their specific historical and economic environments underscores the importance of contextual understanding in investment decisions.

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DISCLOSURES

Any forecasts, figures, opinions or investment techniques and strategies explained are Stringer Asset Management, LLC’s as of the date of publication. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect to error or omission is accepted. They are subject to change without reference or notification. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested.

Past performance and yield may not be a reliable guide to future performance. Current performance may be higher or lower than the performance quoted.

The securities identified and described may not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.

Data is provided by various sources and prepared by Stringer Asset Management, LLC and has not been verified or audited by an independent accountant.

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