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The SD-PFS*Ticker
Vol 2, Issue 2June 2012
70's Themed Graphic

Dear Clients and Friends:

If you are anything like us, there are a number of things from the 70s that you're not anxious to revisit. Among them, bell-bottoms, tube tops, platform shoes and market conditions! Check out Nancy Skeans' article below on comparisons between today's economy and that of the 70s.

As the new school year approaches, we've included a number of links in the Toolbox on the right for helping your kids with chores and allowances. Perhaps one of them will be just what you need to get that dishwasher emptied each night.

Lastly, it's never too late to be prepared for an emergency. Although we don't believe zombies will be a real threat, the link to the right will talk about how to be prepared in case of an actual emergency.

We hope you are having a pleasant summer and that you'll enjoy this look back at
a "blast from the past." As always, please feel free to call us with any questions at
412-697-5200.
Welcome (back) to the Seventies!Platform Shoe
... Nancy Skeans

 

What do you remember about the 1970s? As 1970 dawned, I was in second grade having recently migrated from Michigan to Arkansas. The school system in the small Arkansas town was still segregated at that time, only breaking down that wall in the fall of 1970 when I entered third grade. I spent the entire decade completing my primary and secondary education. Although I have lots of memories, my focus was not really on the U.S. economy, the equity market or world events unless something directly impacted me. I do vividly remember the summer that the only thing on daytime TV (yes all three channels) was the Watergate trial. I was also painfully aware of the rising price of gasoline, having purchased my first car in 1978.

 

To help write this article, I first turned to a fabulous book, DK Millennium 20th Century Day by Day.  It walks through 100 years of newsprint from the twentieth century, complete with pictures. I opened the book to the year 1970 and started reading. Second, I turned to David Stephan, the youngest member of our team and whose presence never graced the seventies. David's mission was to use the internet to research economic and stock market trends for that decade and to see what, if anything, the equity market of the 1970s could tell us about today.

 

I will start with the headlines. When 1970 began, the United States was still deeply mired in the Vietnam War. On May 18, 1970, National Guardsmen fired into a crowd of students at Kent State University killing four. In the same month, Charles Manson went on trial for the murder of eight individuals. Jimi Hendrix and Janis Joplin both fell victim to their demons in 1970, dying within weeks of each other of drug overdoses, but I digress. The U.S. economy was not doing great. In August 1971, President Richard Nixon ordered sweeping economic changes due to runaway inflation and a falling dollar. As Vietnam ended in 1973, the Watergate scandal exploded into our living rooms. The Middle East erupted into another wave of violence as the Egyptians and Syrians launched an attack on Israel during Yom Kippur, and the threats of OPEC (the Organization of Petroleum Exporting Countries) became a dinner topic. Although established a decade earlier, it was in late 1973 that OPEC really began flexing its muscles in protest of U.S. support for Israel. Did you ever wait in line for gasoline?

 

Folks, we have only brushed the surface of the news and are only through 1973! I could certainly spend pages and pages walking you through all of the trials and tribulations of the 1970s. Your time is valuable; though, so let's just hit some highlights: Runaway Inflation, Energy Crisis, The Cold War, Wage and Price Controls, Oil Embargo, Recession, Stagflation, Escalating U.S. Debt, Terrorism, the Camp David Accords and let's not forget the 52 American hostages being held in Iran as 1979 came to a close. Did I miss anything? For those of you who were in Western Pennsylvania during this decade, your memories will no doubt include the collapsing steel industry and with it, the struggles of the local economy. (Patrick Fisher, born and raised in Pittsburgh, asked that I point out that some of this pain was offset by 2 Pirate World Series wins and 4 Steeler Super Bowls.)

 

So what was happening in the U. S. economy and the equity market? Here is what David shared:

 

The U.S. economy was exiting a mild recession when 1970 rolled in with unemployment peaking at 6.1% in December of 1970 (not bad). However, in November 1973, the U.S. entered a much deeper recession that lasted until April 1975. Unemployment peaked in May 1975 at 9%. Prices did not fall in the 70s as we experienced during the most recent recession - they soared. Rising prices were blamed mainly on rising oil prices, but during this time, the U.S. also went off the gold standard and printed more money. Less than five years later, the U.S. was back in a recession, actually a double dip, which began in 1980. The first dip lasted six months, but it was followed by a second and deeper recession in July 1981 that persisted until November 1982. This period experienced the worst quarterly decline of GDP since the Great Depression (that was until the 2008 - 2009 recession). Unemployment peaked at nearly 11% in November 1982 and remained over 8% until January of 1984. Our current recession saw unemployment peak at 10% in October 2009. It has declined to around 8% at present.

 

In regards to inflation, it had risen to almost 9% by 1973 and later reached over 14% by the 1980s. Mortgage rates skyrocketed to the high teens. Inflation during the current recession had a peak of almost 6% in mid-2008, but then dropped to less than 1% by the end of 2008. Today, inflation remains normal at around 2%. Mortgage rates are at historic lows.

 

What about the U.S. equity market? For simplicity, we will use the Dow Jones Industrial Average (Dow) as our proxy. During the 1970 recession, the Dow hit a high of about 1,051 in January 1973, and then lost over 45%. The Dow then rallied from time to time, like in 1980 when it gained almost 30%, only to lose all the return by 1982. Basically, the equity market went nowhere for more than a decade. The current recession saw the Dow hit a high of about 14,164 in October 2007. Then due to the housing bubble, fell to around 7,552 by November 2008; a loss of over 50%. In March 2009, after a 2008 year-end rally, the equity market fell off the proverbial cliff. For the last three years, the Dow has struggled higher and then given back some of its gains to fear, domestic or abroad, that the worst is not yet behind us.   Our market, like that of the 1970s, has been going sideways for more than a decade. Can this type of financial destruction happen in a normal rhythm? (See graph below.)

 

Taking a 16-Year Breather(data updated from source to present)

According to John Bollinger, through history, stocks have gained and then flattened out in roughly 16-year cycles.
 

 70s market graph

Our stock market has seen multiple long run ups followed by long-lasting plateaus. John Bollinger, founder of Bollinger Capital Management, says it is the market taking another "16-year breather" and would be on rhythm to end by 2014. John Ferris, founder of Max Advisors Private Management, believes the most likely reason is not as dependent on oil prices, inflation, or the government handling of the economy, but investors' extreme love and extreme hate of stocks. Investors go from severely undervaluing stocks to severely overpaying for them in these long cycles. Similar to the last breather, we are in an era of lower P/Es and a desire for high dividend yields. Another interesting market similarity between the 1970s and the current market is that corporate earnings also grew in the 1970s just like they have been most recently, but stock prices in both periods went nowhere. The explanation could be that before the plateau, many people paid an excessive amount for the same stock, and due to losses, refused to make an investment even at a lower price. People did rush into gold in the 1970s as an alternative investment driving the price up significantly. On May 1, 1972, an ounce of gold sold for $50. Eight years later, it was trading above $850. By 1985, an ounce of gold had fallen below $400 and continued to fall until 2000 when, once again, economic uncertainty began pushing investors back into the shiny metal.

 

So, why dredge up the bad memories of the 1970s? Those days are long behind us, and in the case of Western Pennsylvania, didn't the region practically reinvent itself? Yes, as did much of the United States. As I trundled off to college in the summer of 1980, the future did not look so grand. Some were even saying that the best days of the U.S. were behind us. Obviously, in 1979 when Business Week's cover story was "The Death of Equities," investors had all but given up on the stock market.

 

By the mid-1980s, the landscape of the U.S. economy had changed and the future was brightening rapidly. The financial upheaval that defined the 1970s and early 1980s was also the catalyst for change. The problems we are facing today are different, or at least caused by a series of different events, but the reasons we change often come out of necessity. The companies that we invest in are also undergoing change. Who has not read about the enormous amount of cash that many companies have stockpiled? Is this out of fear? Perhaps, but ultimately, it will be funneled into new products, acquisitions or even higher dividends and hiring. Historically, when equity markets are beaten down, stock investors have made better returns if they have the patience and financial wherewithal to deal with the volatility and negativity. At the end of 1982, the end of the last 16-year breather, the Dow was hovering just over 1,000. By January 2000, before the most recent drought set in, it peaked at 11,723.   Will we see that pattern repeat when this breather ends? No one can say with certainty, but I won't be the one betting against it.

 

Possible Client Event

 Shredding

Speaking of the 70s, do you still have documents lying around that you should have disposed of long ago? Old tax returns, outdated wills, cancelled checks, and utility bills can take up space and present an identify theft hazard. We're considering hosting an event for our clients to provide a mobile shredding truck for document drop-off. We would likely do this on a Saturday morning this fall. Please email Karen Werley at kwerley@schneiderdowns.com if you think this would be beneficial. If we get enough of a response, we'll get it scheduled and send out the details later this year.

 

The Schneider Downs Wealth Management Team

Don, Nancy, Beth, Patrick, Vicky, Theresa, Karen, David and Amy
Quotation Marks

"We all want to
change the world." 
~ The Beatles

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"The Devil In
The White City"
by: Erik Larson
 
 

A thrilling tale of history, intrigue and suspense at the 1893 Chicago World's Fair. It is the story of two very different men. Their fates were linked by the magical Chicago World's Fair, nicknamed the "White City" for its majestic beauty. Architect Daniel Burnham built it; serial killer Dr. H. H. Holmes used it to lure victims to his World's Fair Hotel, designed for murder. Both men left behind them a powerful legacy, one of brilliance and energy, the other of sorrow and darkness.

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