In the Markets Now - Party Like It's 1982
(Baird’s Ross Mayfield, CFA wrote the following piece in April 2022)
Looking to A(nother) Historical Comp for the Current Environment
Last week, we wrote about the similarities between the year 1994 and 2022 (in summary: a hawkish Fed, rising rates, bond weakness, and a volatile stock market). This week, thanks to another hat tip from our colleagues at Strategas, we are again trekking through this exercise for the year 1982. As the policy team over at Strategas summed it up, “We are calling 2022 ‘Déjà vu 1982’ since the main issues then were inflation, Russia, and a midterm election.” With that as a backdrop, let’s dig in further.
- High inflation. Inflation is above 8% for the first time since 1982, when a combination of easy policy, geopolitical shocks, and entrenched consumer expectations drove CPI to record highs (much like today). Unlike today, however, inflation in 1982 was already largely in retreat thanks to aggressive interest rate hikes and recession. Today, the Fed finds itself facing the same question Fed Chair Volcker faced in the late 1970s: how aggressive must we get to curb inflation?
- Geopolitics (and Russia) front and center. Both 2022 and 1982 featured tense US-Russia relations and global commodity price shocks. The 1970s saw two major crises (the 1973 Arab oil embargo the 1979 Iranian revolution) that sent the price of oil skyrocketing from $20/barrel to $140, greatly contributing to inflationary pressure. Further, the ongoing Cold War with Russia kept geopolitical uncertainty high and weighed on corporate and consumer sentiment.
- There was a midterm election. This topic is best left to our colleagues at Strategas – see here. However, it is noteworthy that like many other midterm years, the 1982 market rallied into year-end once some of political uncertainty abated. Midterm election years tend to feature some of the biggest selloffs and highest volatility of any year in a Presidential cycle, but investors who stay the course are, on average, rewarded with strong outperformance as a result.
As we concluded last time, we’ll note that looking to one specific period in history can be complicated and the full context is necessary. For instance, in 1982 the Fed was already well into its battle with inflation – today it is just beginning; 1982 was a year in recession – today’s economy is booming. Still, the similarities are noteworthy, and more broadly, the unease and disdain associated with high inflation, geopolitical turmoil, and domestic politics fit squarely with the mood of today.
Most importantly, the market persevered the 1982 environment, rallying into year-end and ultimately kicking off a multi- decade bull market that lasted until 2000. Even if we shorten the timeframe a bit, the market rally and economic strength continued after 1982 ended. One year is a small sample size, and given the complexity of the world, there are certainly differences to be aware of, but we believe history can ground us when the future is unclear. And as we navigate an increasingly complex and challenging world, taking lessons from a year like 1982 may offer insight as we forge ahead.
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