Investing Lessons from the '70s Crash

Not that events will unfold in precisely the same way as before, of course. Professionals whose careers were forged decades ago see key differences between the period of the ’70s through the early ’80s and now. A chief source of anxiety then was inflation and the higher interest rates that came along with it. Investors today are preoccupied with a banking system that has all but collapsed, the prospect of deflation, and interest rates that have fallen practically to zero, leaving authorities with little room to maneuver as they try to revive the economy.

The investing historians point to a few important similarities, though. “The recession of 1974 to ’75 was very much like this recession,” says Stuart Schweitzer, a global strategist at J.P. Morgan Private Bank. “There was a shock ― then it was oil, this time it’s a combination of a financial shock and record oil prices ― that sent the economy and markets into a tailspin.”

Both periods share a rotten mood as well as a rotten economy. Michael Avery, co-manager of the Ivy Asset Strategy Fund and a market observer for three decades, remembers a sense of resignation ― and actual resignations. Some colleagues left the business and many who stayed were more spectators than active players.

“What struck me is that people I viewed as brighter than me were making the call that there was no future in the business,” says Avery. “Until 1982, they were right. In those days not much happened. I remember how little prices changed and two-hour lunches.” A widespread view then was that “cash was a smart investment,” an attitude he sees echoed in today’s strong demand for Treasury bonds and bills.

Schweitzer, who has been at J.P. Morgan for about 35 years, recalls a sense of urgency echoing the way many shareholders feel today. “There are many parallels, but I assure you the most common one is abject fear,” he says. “Then, as it sometimes feels now, the situation felt as though we were in a bottomless pit.”

It turns out we were not in a bottomless pit at all, something well worth remembering. A key lesson of the lost decade of the 1970s is that a recovery begins when nearly everyone is convinced that there will never be one. Once it is under way, the market tends to produce outsized gains.

Investors who had the courage and foresight to hold on back then or to buy shares (while others were selling) ended up far ahead over the long haul. When the market reversed course in the early ’80s, the rally was robust. In the decade after the rally beginning in August 1982, the Standard & Poor’s 500 index had an annual average return ― share price appreciation plus dividends ― of 19.2 percent. That’s double the 9.5 percent average annual return throughout the 81-year life of the S&P 500.

But Elizabeth Ruch, senior financial planner at Waddell & Reed in San Diego, recalls that many who bailed out never bailed back in. However, buy-and-hold investors “hung in there and stuck it out, and they’re so grateful that they did,” says Ruch, who began her career near the tail end of the lost-generation years.

Benjamin Tobias, a longtime Florida financial adviser, predicts that investors whose fear has been driving them to sell “will probably be in cash for the rest of their lives.” Instead, Tobias suggests, you should make the most of any fear you still have. “I think you should be looking at this as probably the best time in our lifetime to buy equities,” he says.

Schweitzer won’t go that far. He remains concerned about the financial system’s difficulties, the one factor substantially different from the lost-generation years. But he sees history repeating itself in enough other ways to convince him that this will turn out to be a good time to buy. “The market can be expected to bottom well before the economy and well before it’s clear from the news flow that conditions are truly better,” he says.