When all you read is gloom, turn here for a much different perspective.

Wednesday, March 11, 2009

Remember 1979: Is this time different?

In 1974 and 1975 the majority was wrong about any positive prospects for the US economy. How about 1979?

On the cover of Business Week magazine on Aug 13, 1979, the headlines announced "The Death of Equities" and the byline: "How inflation is destroying the stock market." But last year Money magazine said, "That, of course, turned out to be one of the great buy signals of all time."

By getting into stocks right then, savvy investors beat inflation easily for the following 5 to 10 years.

But this time is different right? Yes and No. Of course 2009 is a different time in history. But a fascinating paper by the economics department at Harvard, reveals that a significant number of factors are the same now as compared to other financial crises that have occurred for 800 years!

They find that these gloomy financial episodes "are typically spaced some years (or decades) apart, creating an illusion that 'this time is different' among policymakers and investors." Further they conclude that, "the recent US sub-prime financial crisis is hardly unique."

So are stocks dead this time? Or just resting?

Following the Business week article in 1979, buying stocks would have yielded, after inflation, an average annual return of 7.3%. The 10-year performance yield: 9.52% annually. Further, history shows that for 20- and 30- year periods, inflation-adjusted gains on stocks have never been negative.

So are we at the tipping point in the bear stock market of 2008-2009? What about 2010? Have another look at our recent charts and graphs. You be the judge. Because remember most economists make astrologists look respectable.

5 comments:

  1. Eldon,

    Pretty interesting real estate news out of San Francisco:

    http://cbs5.com/business/real.estate.sales.2.956968.html

    Click on the video the right of the headline to view the full story. More sales in the last two weeks than in the last SIX months.

    ReplyDelete
  2. Thanks for the link Anonymous,

    I'd encourage everyone to have a look at the video. It highlights very significant signs of a real estate rebound in the San Fran market.

    ReplyDelete
  3. "Following the Business week article in 1979, buying stocks would have yielded, after inflation, an average annual return of 7.3%. The 10-year performance yield: 9.52% annually." -
    IF you sold. They never mention that.

    ReplyDelete
  4. It seems that folks in the know forget that the job rates are the last to improve. so they will continue to be bad for awhile, correct? Like shaking out the dust mop. It all takes time to correct. So hard if one is not employed.

    ReplyDelete
  5. Yes Martha,

    You are so right. The basic premise of Harvard paper is that the "folks in the know" forget...

    Best,
    GNE

    ReplyDelete

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