Parallels with the 1970s are striking
The 1970s comparison with today is uncanny. This correspondent was a British schoolboy in the mid-1970s, and recalls a real estate boom that went bust almost bankrupting my father, and a stock market crash that hit the wealth of stockbrokers so much that they were still discussing it eight years later when I applied for a job in the City.
Sunday, March 18 - 2007 at 09:10
Older market watchers sense a return to the 1970s. We have had an oil price boom, excessive money supply growth, a real estate boom all round the world and a strong rally in global stock markets. This is like the early 1970s which then collapsed with first a slump in real estate in 1973 and then a major stock market crash in 1974.
If we look at valuation trends then again the early 1970s offer a clear parallel. The Dow's valuation trends of the past seven years are close to the late 1960s and early 1970s, with stocks delivering less than double-digit growth since 2000.
It is true that in early 2000 at the top of the Great Bull market the Dow 30 was trading at 45 times earnings and yielding only one per cent in dividends, while at its top a few weeks ago it approached 17 times and 2.4 per cent.
No plunge protectionBut in early 1973, the US stock markets were also trading at moderate valuations, 19 times and 2.7 per cent. This did not prevent the market falling off the edge of a cliff. Indeed, any technical analyst will concur that stock markets swing from overvaluation to fair value to undervaluation, and do not stop at fair value.
It is surely towards the undervalued position that global stocks are headed next. If this 1970s parallel holds true where will be end up? Will we be wearing those awful flared trousers and kipper ties again?
Anything would be better than the investment returns of the later 1970s which were among the worst on record for post-war investors. Real estate recovered somewhat in nominal terms from the 1973 crash and that was when a lot of Arab investors took advantage of depressed London prices to buy up the central districts. But roaring inflation meant that nominal prices declined in real terms.
Stock market investors who bought after the 1974 crash eventually did well but the UK economy was nearly bankrupt in 1975 when the International Monetary Fund bailed it out. And in the US the economy went through a long and painful period of adjustment with a very low US dollar helping to stave off a real economic collapse.
Terrible decadeFor investors who avoided the market crash, and a few jumped ship before the Titanic hit the iceberg, the mid-1970s provided the chance to buy bargains. But for the average investor in real estate or stocks it was a terrible time, and cash deposits actually outperformed the other major asset classes over the decade.
The exception was precious metals. Gold and silver suffered a major setback in 1975-6 but rebounded in the high inflation environment of the late 1970s, and oil prices headed higher again. Gold achieved an eight-fold surge between 1976 and 1980 and silver rocketed higher.
Will investment history repeat itself all over again? If so then avoiding investments now could pay big dividends later. But the late 1970s was a great time for in the Gulf States, and on that reckoning local stocks could be due for a rebound and any softening in local real estate markets should be short lived.