By Tim Courtney, Chief Investment Officer
Consumer prices rose 0.4% last month and are up 8.2% from a year ago despite efforts by the Federal Reserve to tamp down inflation.1 Following that reading came a slew of news articles about how investors should interpret the data, protect their assets and speculation about the Fed’s next moves.
Taking a few steps back will allow us to assess the gravity of the situation we have experienced for the last two years. Covid-19 lockdowns had altered nearly all sectors of the economy before the U.S. government began to increase spending dramatically while the Fed took interest rates down to zero during reopening.2 These actions came at a cost, a cost that is reflected in recent Consumer Price Index data. An entire economic cycle, which normally may last 10 years, has been notably condensed into a matter of two years.
As a result, there is a confluence of factors impacting markets, and most people, including the Fed, do not know what is going to happen next. We can, however, look to some comparisons from the late 1970s.
Approximately 40 years ago, inflation was raging and slower economic growth abounded.3 Paul Volker, the chairman of the Fed at the time, was tasked with halting inflation. He accomplished this by controlling the money supply and raising interest rates. At the time, the Reagan administration had tried to avoid a recession with midterms approaching, but rate hikes ultimately pushed the economy into reverse.4
Some similarities between our current economic situation and the events of the late 1970s to early 1980s are there but, as we know, history rhymes but rarely repeats. Beginning in the 1980s, globalization took off, with international trade flowing and American multinational corporations investing in countries outside the U.S.5 In our current position, more and more companies have begun turning their eye inward as they reshore their operations and build facilities in the U.S., Mexico or Canada.6
Women also began to enter the workforce at an increasing rate in the 1970s. Large gains in productivity and production occurred along with strong growth in Gross Domestic Product.7 Today, trends have reversed with the labor force experiencing many workers leaving or retiring following Covid-19. The manufacturing industry alone lost around 1.4 million jobs in the early days of the pandemic and has since struggled to rebuild its workforce.8 Companies and consumers alike are feeling this considerable loss as supply chain woes continue.
We can look at similarities to the past, which can be helpful, but the reality is that we do not have a neat historical precedent as a comparison. The likelihood of a recession has gone up although indicators such as employment and consumer spending remain heathy. Because of this, the market is trying to estimate when a recession might start, its magnitude and incorporate that into prices. The market is forward looking when generating asset prices, and we focus on the prices of productive assets when determining what to own. If you have any questions or concerns about current market conditions, please contact your Exencial advisor.
- CNBC.com (10/13/22) – Inflation increased 0.4% in September, more than expected despite rate hikes
- Brookings (12/17/22) – What did the Fed do in response to the COVID-19 crisis?
- Investopedia (5/26/22) – How the great inflation of the 1970s happened
- Pew Research Center (12/4/10) – Reagan’s recession
- IMF.org (8/02/2008) – Globalization: A brief overview
- Statista (8/16/22) – Where U.S. companies are reshoring jobs from
- Equitablegrowth.org (3/22/2019) – U.S. women’s labor force participation
- U.S. Chamber of Commerce (9/7/22) – Understanding America’s labor shortage: The most impacted industries
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