Back in the early pandemic days during the spring of 2020, widely followed market strategist Ed Yardeni opined that as gloomy as the moment seemed, the economy and markets might emerge from Covid similarly to the way they reacted a century before following the Spanish flu of 1919.
Although he acknowledged comparisons would hardly be symmetrical, he predicted something of a rerun of the Roaring Twenties. If one looks only at the markets setting new record after record in recent years, the call for a replay of that decade appears prescient. However if one looks at the broader economy, the emergence of artificial intelligence has yet to produce the sweeping societal changes that industries like automobiles and motion pictures did in the 1920s.
Loomis Sayles Vice Chairman Dan Fuss looks at another decade that also bears similarities, particularly on the inflation front—the early 1970s. (Yardeni also sees a chance of a 1970s-style scenario playing out though he gives it only a 20% probability, compared to the 60% odds he assigns to a 1920s boom taking place.)
From Fuss's perspective, the 1970s was a period in which Fed Chairman Arthur Burns was trapped as President Richard Nixon was trying to wind down the Vietnam War and incipient inflation was beginning to gather momentum. It’s worth noting that while the Roaring Twenties were followed by the 1930s and the Great Depression, the 1970s gave way to the 1980s, a period widely seen as an era of prosperity.
The stock market 50 years ago was starting to run out of momentum from the so-called Go-Go years of the 1960s, as market leadership narrowed noticeably down to a group of growth stocks, the famous Nifty Fifty, which kept appreciating while the rest of the market stalled. Fuss noted that not all of the Nifty Fifty were growth stocks.
Still, some companies like Sears Roebuck and Avon managed to find their way into that exclusive club even if they lacked the attractive financial metrics of the rest. Stocks kept climbing until May 1973, when they finally ran out of gas as the Watergate scandal started to dominate the national agenda.
Gradually but inexorably, stocks began the worst bear market between the 1930s and the tech bubble. As Fuss recalls, "They went down and down." Excesses from a 15-year bull market starting in the late 1950s exposed vulnerabilities in most sectors and the decline was exacerbated by the Arab-Israeli war and subsequent oil embargo in 1973. That caused a severe recession and eventually created a generational buying opportunity in equities that would take years to become apparent.
The likely slowdown from a gradual military exit from Vietnam prompted the Fed to consider lowering rates but other rising cost pressures within the economy conspired against easy monetary policy. Ultimately, Burns lowered rates and got blamed for a decade of nasty inflation.
One major difference Fuss discerns between the Fed’s current dilemma and the trap it faced in the 1970s was that in the earlier era a war was winding down. Today, hostilities in several flashpoints around the world are intensifying, though no conflict has yet to involve American troops. “Today, there is a risk of war,” Fuss said in an interview.
Another difference is that in the 1970s the developed world was suffering from the end of the post-World War II productivity boom. Today AI and robotics could be fueling a new productivity boomlet, following a drought in the 2000-2020 period.
That’s something upon which Yardeni and Fuss agree. “Modern technology is cutting down on the need for people,” Fuss said. “Lots of workers may be partially replaced by machines and AI.”
On the positive side, workers are also becoming more productive, he added. This appears to be showing up in GDP statistics, which are running at a noticeably higher pace than during the previous two decades. Unfortunately, many of the new entrants to the workforce, mainly immigrants, lack the skills some of the new jobs demand. Furthermore, while the overall job market remains strong, lots of workers, including many high-paid technology and finance workers, have lost their jobs in the last two years.
“It is said the Fed is reluctant to cut [interest rates] because it’s an election year,” Fuss noted. Ultimately, he thinks the central bank will cut interest rates, but they can’t do it “until there is weaker economic data.”