Stocks sold off yesterday as tensions continued in Ukraine. Chairman Powell’s testimony calmed nerves but another Fed official roiled them later in the session causing markets to lose ground.
An old friend returns. So, we are staring down painful inflation and a madman is blowing up civilians and setting fire to nuclear power plants in Eastern Europe. Wait, what year is this again? It is 1972 and a gallon of gasoline will cost you about $0.35. That’s right, 35 cents! In those days, crude oil was $1.82 / barrel. Leonid Brezhnev was in charge in the Soviet Union and Richard Nixon was the US President. The Cold War was very much in full swing, though the two leaders attempted to cool things down and entered into the Anti-Ballistic Missile Treaty that year. The treaty limited the use of defense missile systems…that’s right, the systems used to defend against nuclear attacks. Is this ringing a bell yet? Vladimir Putin actually began to rattle a saber several years back when the US shipped defensive missile systems to Eastern Europe. Ok, back to energy.
By late 1973, crude oil had risen by nearly +50% and gasoline prices were on the rise. In fact, all prices were on the rise and the US was experiencing a bout with severe inflation. The CPI was over +8% and the Fed was actively fighting it, doubling the Fed Funds rate to over 10%. High inflation and higher interest rates caused consumption to drop off heavily leading the US Economy into a recession. Unfortunately, energy prices continued to climb in 1974 with the Middle East Oil Embargo, which brought crude oil to $11/ barrel, a +500% increase from just 2 years earlier. Thankfully, inflation would peak in late 1974 and the economy was able to emerge from recession. Unfortunately, oil and gasoline prices would continue to climb through the 1970s. Crude oil would top $35.50 / barrel by 1980 and gasoline was above $1 for the first time. Inflation followed suit and the CPI would hit nearly 14% while the Fed Funds rate was at 13.78%. Guess what followed? A recession. This was also a period in which the Cold War grew a bit cooler. The Soviet’s invasion of Afghanistan drew sharp opposition from the West. The period of so-called détente was over, and the US boycotted the Moscow Olympics. It only got worse before it got better when the Berlin Wall fell in 1989, which was a prelude to the collapse of the Soviet Union in 1991. That ushered in a new period of détente between the now Russian Federation and the West.
Clearly there are many differences today, but there are also many similarities. Energy costs are rising for a very different reason, though its devastating effects are the same on the consumer pocketbook. Similarly, rapidly rising inflation is taking its toll on disposable income and consumer confidence. Eastern European aggression has reemerged, and the threat of nuclear war is once again being threatened. Russian tanks rolled into Ukraine just about a week ago and it is unclear how long the crisis will last. Crude oil and gasoline have not hit current levels in almost a decade and the Fed is almost certainly going to raise Fed Funds next month. The bright side is that it is most likely going to be a +25 basis point hike -- a far cry from the double-digit Fed Funds rates of the 1970s and 1980s. These are challenging times, indeed, but we have been through similar and worse ones before. Of course, I must close with a reminder that the S&P500 is +3,596% higher than it was in 1972…when we thought that 35 cents for a gallon of gas was a travesty.
YESTERDAY’S MARKETS
Stocks traded lower yesterday as tensions in Eastern Europe continued to wear on investor sentiment. The S&P500 lost -0.53%, the Dow Jones Industrial Average fell by -0.29%, the Nasdaq Composite Index dropped by -1.56%, the Russell 2000 gave up -1.29%, and the S&P500 ESG Index declined by -0.54%. Bonds gained and 10-year Treasury Note Yields fell by -3 basis points to 1.84%. Cryptos dropped by -4.41% and Bitcoin lost -4.52%.
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