Tuning Out History’s Record

Clark Winter, Citigroup Private Bank, Chief Global Investment Strategist, 1 October 2005


Financial markets like to look to the past to explain current events and divine upcoming market behaviour. Right now, the history in vogue i...

Financial markets like to look to the past to explain current events and divine upcoming market behaviour. Right now, the history in vogue is the early 1970s. The similarities between that era and today are strong, and while useful, it is important to remember that they can only take you so far in predicting the future.

Let’s go back three decades. In 1973, OPEC created supply constraints with an oil embargo, sending oil and gasoline prices skyward. The world was beset by terrorism and political scandal, respectively fostering uncertainty in markets and distrust of institutions and government. Corporate America was bloated and inefficient.

US debt levels were rising at a rapid pace as the US was mired in an unpopular war. The US had barely gotten past the deep recession of 1969–1970 and would enter an even deeper one in November 1973 that would last until March 1975. The yield curve inverted and the US equity markets meandered sideways. Singed investors fled to cash, which actually outperformed all other asset classes in the last half of the 1970s.

Today, energy prices are skyrocketing because of rising oil demand and refining capacity limits. Terrorism, scandal (corporate as opposed to government), war, soaring US debt levels… this all seems familiar. As far as the markets go, US stocks are stuck in a range again, after recovering somewhat from the bursting of the high-tech bubble, while the yield curve has flattened and could potentially invert. And again, skittish investors are sitting on their cash.

But there are glaring differences between today and the 1970s. An important one is the global economic picture. Today, the world’s economies, save for a few laggards, are vibrant and expanding at a vigorous, seemingly sustainable pace. Many countries that 30 years ago were in profound economic and political crisis from the constraints of communism are today well along on the path of reform; in some cases these same nations now lead global economic growth. And inflation today is tame.

What’s more, whereas employment used to be hard to come by, job growth is improving now that the US economy has restructured to a service economy from a primarily industrial one. That trend should continue, as retiring Baby Boomers open the job ranks to millions of new entrants over the coming two or three years.

Finally, after years of restructurings, most companies today are adroit and streamlined, and those that are not have private equity firms and raiders like Carl Icahn to spur them to action. There’s no question that the global economy and the US economy are much healthier today.

Of course, there are some unknowns particular to our era. Investors worldwide are focused on how well US leadership resolves the current hurricane-driven crisis and implement a rebuilding initiative. Many wonder whether the Bush Administration will engulf the media in an assignation of blame. I believe there will be increased demand for government action on numerous fronts, not only for the military but also for re-building programs in the Gulf region.

Perhaps a reinstallation of mandatory government service, even a universal draft, could be to come. That could have serious consequences. Given already-deep federal budget deficits, any additional expenditures — for Iraq, Hurricane Katrina, a larger military and, let’s not forget, the millions of retiring Baby Boomers — may cause investors to further doubt the US’s ability to repay its debts.

And that’s the biggest difference between today and the past. In the 1970s, investors mostly just had US stocks, bonds and the dollar to choose from. Today, there are pockets of opportunity in economies around the globe.

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