Stagflation is Coming | InvestorPlace

In the Digest, we talk to numerous market experts, and today I want to introduce you to Justice Litle, editor of TradeSmith Decoder.

I spoke to Justice this week, and his analysis about the state of the market and where it’s going in the future is incredibly important. Anyone with money in the markets – whether you are thinking of retirement or just starting your career – needs to consider the factors Justice sees impacting stocks.

That’s why this weekend, we’re running a special two-part series from Justice. Today, we’ll dive into why we’re at risk of a lost decade in the stock market.

Tomorrow, we’ll build on that, walking through the market since 1969. Justice will explain why the tailwinds that stocks enjoyed over those decades can’t be counted on today.

This is an important, powerful series that all investors should read to understand what’s coming.

Enjoy your weekend,

Luis HernandezEditor in Chief, InvestorPlace


1969 Revisited (A Decade of Going Nowhere)

When stocks go down, bonds are supposed to go up, in such a manner that rising bond prices can offset the pain of falling stock prices.

That is the logic behind the universally popular 60/40 portfolio, which allocates trillions of dollars’ worth of retirement capital to a mix of 60% equities and 40% bonds — and that logic has applied for nearly a century.

It sure hasn’t worked in 2022, though.

On a global basis, this has been one of the worst years for bonds in centuries — going all the way back to the 1700s — and yet the major stock indexes are mired in bear market territory. (As of this writing the S&P 500 is down more than 22% on the year, and the Nasdaq 100 down more than 32%.)

“Going back to 1929, there have only been 3 years where bonds didn’t go up when stocks went down,” says money manager BlackRock.

“In 1931, we saw a currency crisis that forced Britain to abandon the gold standard,” Blackrock reports. “In 1941, the U.S. entered World War II. Both years include a unique set of circumstances. But the 1969-70 episode is perhaps the most relevant today.”

BlackRock then observes that, in 1969-1970, “a combination of many factors including loose monetary policy, generous fiscal stimulus, and energy supply disruptions sparked a decade of higher inflation.”

Gee, that sounds familiar. One could run a checklist comparing the 1969-1970 period (and the decade that followed) to today:

  • Loose monetary policy and aggressive fiscal stimulus — check.
  • Currency devaluations and forex upheaval — check.
  • Energy crisis, oil embargoes, and gas lines — check.
  • Wars, revolutions, and geopolitical strife — check.
  • Rising wages and growing labor power — check.
  • Civil unrest and social strife — check.

It shouldn’t be a surprise we are recreating a phenomenon last seen in 1969 — stocks and bonds finishing deep in the red simultaneously — given the similarity of circumstances.

But too many investors are still assuming this is a one-off thing, hoping we can just get past 2022 and forget it ever happened.

They aren’t considering the possibility we could be in for 10 to 20 years of this.

14 Years to Nowhere

One person who sees such a possibility — a kind of “lost decade” for stocks — is Stan Druckenmiller.

His view matters because, in our opinion and that of countless others, Druckenmiller is the money manager GOAT — the Greatest Of All Time.

When Druckenmiller retired from a storied money management career in 2010 — he runs his own money now, with a net worth of $10 billion — he had put together a track record of 31% average annual compound returns, over more than 30 years, with no losing years. Druckenmiller achieved those results as the ultimate “go anywhere” practitioner, giving him multiple bites at the money-making apple in all manner of moneymaking environments.

Whereas the typical investor is focused in one opportunity vector — long stocks — Druckenmiller had the ability to go long or short in stocks, bonds, commodities, and currencies, giving him eight vectors instead of just one.

One year he might make a pile being long stocks… in some other year it might come from going short… and in yet another year it might be commodities or forex, and so on.

In addition to incredible flexibility and diversity, Druckenmiller’s go anywhere approach gave him an extraordinary feel for big-picture market patterns, informed by a deep knowledge of market history.

In a recent interview Druckenmiller said this:

I heard a guy on TV this morning saying, “I’m really bullish on the long term.” Well I’m actually not bullish on the long-term. I mean anything can happen over the next 18 to 24 months; but what I’m worried about is like a ’68 to ’82 period, where you go up or down three or four times but you basically go nowhere.

Why did Druckenmiller cite 1968-1982 specifically?

For one thing, the 1968-1982 window encompasses the nasty market conditions we are seeing a repeat of now — energy crisis, wars and geopolitical strife, red-hot inflation, and so on.

But just as importantly, the S&P 500 literally went nowhere — with a whole lot of drama along the way — in that 14-year period.

  • In 1968, the S&P 500 saw its high point of the year — and the decade — above 108.
  • In 1982, at its low point of the year, the S&P 500 fell to 107.
  • As such, an investor could have checked the value of the S&P 500 in the pages of the Wall Street Journal in 1968… fallen asleep Rip-Van-Winkle style for 14 years… then checked again in 1982 to see zero gain.

Fourteen years of nowhere sounds lousy from an investment standpoint — but the actual experience was worse than boring, because the stock market was a violent roller coaster in those years. Between its 1968 high and 1974 recession low, for example, the S&P 500 fell 41%.

But price volatility doesn’t capture the full extent of the pain either, because investors were also losing money to inflation during that period.

To understand the “real” return of an index, you can’t just look at the nominal level of index prices, that is to say, the reported number that shows up in the paper every day — you have to adjust that number for inflation to account for lost purchasing power.

And when the nominal level of the S&P 500 is adjusted for inflation, that is when the real shocker hits. In real inflation-adjusted terms, per data via, the S&P 500 did not recover its 1968 highs until 1993 — an incredible 25 years later.

The possibility of a “lost decade” for stocks — or even back-to-back lost decades — is a very real thing.

By that meaning, the major stock indexes could ultimately go nowhere, with a whole lot of volatility between here and there, for the next decade or two.

What’s more, this is not just a random possibility, like getting a bad spin on the Big Wheel from that old game show, “The Price is Right.”

Instead, it is a very real possibility, based on the parallels we are seeing with the 1968-1982 period — coupled with the fact 2022 is already a bearish doppelganger of 1969.

Tomorrow, we’ll pick back up with a deeper dive into the past four decades, why we can’t count on the same bullish influences to save the market today.


Justice LitleEditor, TradeSmith Decoder

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