Debunking The Myths – Did Stocks Really Go Nowhere From 1966

Our investment newsletter, The Prudent Speculator, recently published a report showing that stocks historically have been indifferent to rising interest rates (and inflation). In fact, equities, especially those of the Value variety, have performed well, on average, whether rates are rising or falling.

The Prudent SpeculatorConsider Cheering Higher Rates – The Prudent Speculator

One reader took issue with our arguments and I paraphrase his comments.

I appreciate and commend your stock market investment approach. However, some of these charts are hard to believe. For those of us who invested in the 70’s during a time frame of escalating interest rates, the stock market gyrated but the bottom line is it just moved sideways…as you may or may not recall, during this ‘nowhere’ time for stocks, money market mutual funds were yielding 12% to 14% and U.S. Treasuries and investment grade bonds even higher. With the rampant inflation, it just wasn’t a prudent time to be in the stock market.

We appreciate all reader communication, and we always welcome challenges to our data, but this fellow was not the first to make the “nowhere” claim.

In fact, The Wall Street Journal wrote last year:

It helps, whenever markets turn worrisome, to look at historical precedents. How bad could things get?

In this case, what U.S. investors should probably fear the most is a replay of the stagflationary slog from 1966 to 1982, when economic growth was spotty, inflation stayed double digits for years and stocks went utterly nowhere.

On Feb. 9, 1966, the S& P 500 closed at a then-record 94.06. More than 16 years later, on Aug. 12, 1982, it stood at 102.42.

Corporate earnings, after inflation, shrank 15%, according to data from Yale University economist Robert Shiller.

Yes, stocks paid generous dividends, reaching nearly 6% by the end of the period, but inflation devoured them whole.

That period was such an ordeal it turned the individual investor into an endangered species.

Such a claim sounds accurate in that the Dow Jones Industrial Average actually lost ground from the end of 1965 to the end of 1981, but that assessment ignores dividends and the impact of their reinvestment.

Some have suggested that dividends don’t count. However, if this were true, the income received on bonds should not count either, which would negate the entire point of investing in the fixed income asset class. Same thing with money markets funds and most bank savings instruments as the price return on those instruments is always zero, and real estate would also likely be of much less interest as rental income would not count.

Obviously, it is silly to ignore the income an investment produces and a total-return analysis of how stocks and bonds performed over those 16 years is eye-opening to say the least. After all, despite losing nearly 10% on a price basis, the Dow’s total return during the period was 3.94% per annum and the S&P 500’s was 5.95% per annum.

Even better, and illustrating why we find value in applying rigor to stock selection, from the beginning of 1966 to the beginning of 1982, the total return on Value stocks was a superb 13.39% PER YEAR. Needless to say, we can only hope that we have another “sideways” market like that one.

To be sure, short-term cash-like instruments were a decent investment during those same 16 years, even as the 6.8% annualized return on 30-Day U.S. Treasuries trailed the 7.0% annualized inflation tally.

Of course, bonds were miserable investments as Long-Term Corporates returned 2.9% per annum and Long-Term Governments returned 2.5% per annum, so there was a massive loss of purchasing power in these supposedly safe fixed-income instruments. True bonds had large yields, but a big reason they were so high during that time is that their prices plunged!

Past performance is no guarantee of future returns, and I am not suggesting that stocks won’t decline in price – anything can and will happen – but I will always challenge assertions based on factually incorrect or incomplete data.

As we live by the Vannevar Bush quotation, “Fear cannot be banished, but it can be calm and without panic; it can be mitigated by reason and evaluation,” we invite folks to check out for themselves the sourcing information for our return figures that are denoted in the chart below. After all, the secret to success in stocks is not to get scared out of them!