How do REITs perform in the Stagflationary 1970s 'Lost Decade'?
Who's afraid of a little stagflation? You wouldn't be, if you studied asset class returns.
Why did markets sell off so much this week?
US 1Q GDP came in at 1.9%, much lower than the 2.4% expected. At the same time, core and supercore inflation stay high.
This brings back fears of stagflation, where inflation stays high while growth weakens.
This traps the US Federal Reserve, preventing them from cutting rates.
Stagflation isn't new. It happened in the 1970s, leading to a period of poor stock and bond returns.
Investing in most stocks during stagflationary periods yields poor results
Investing during the “lost decade” of the 1970s was tricky.
$100 invested from 1965 to 1975 will give you $150 at the end of 10 years. That's a nominal IRR of 3.77%, or real IRR (after inflation) of -1.5%.
Not great, for a 10-year holding period.
What if we extended the investing period to 15 years?
From 1965 to 1980, $100 invested will grow to $286 after 15 years. That's a nominal IRR of 6.8%, or real IRR (after inflation) of 0.2%.
Slightly better, but still not that amazing, for a whopping 15-year period.
How do we invest during the challenging go-nowhere stock market of the “Lost Decade”? That refers to the stagflation period from 1965 to 1983, which saw 4 recessions and high inflation.
Which investing strategies work for a “lost decade” from 1965-1983?
Sell sell sell!
Just kidding.
It’s hard to put money under the mattress for 18 years.
I'm not saying we are entering a stocks go-nowhere decade either.
It's just good to be prepared, just in case.
If you look at the chart below, you will see that there are ways to beat the “lost decade” of the 1970s.
Hold elevated levels of cash, in fixed deposits, US T-Bills, any high yield short term liquid instrument.
Invest the cash during market lows.
Of course, it is not easy to catch market bottoms.
Technical indicators and a preset range can help. Disciplined buying on the way down, past a correction threshold, can help too.
Most of all, overcoming that urge to sell everything at a low and buy high hoping for a recovery is not the thing to do.
Blackrock recommends real assets in a “lost decade” like the 1970s: Real estate, commodities and gold
Traditionally, real assets like real estate, commodities and gold have been a good inflation hedge.
However, this is easier said than done.
As you can see from the above chart, real estate prices tracked inflation closely in the 1970s, including the 4 recessions and boom bust cycles of 1965-1985.
I don't know about you, but buying a heavily levered instrument like property through a bust cycle, with most likely peak mortgage rates, sounds like a recipe for negative equity.
If you have holding power, of course, then by all means go ahead: negative equity in the short term does not translate into outright disaster if you can hold through tough times.
The Case for Commodities and Gold?
Let's look at 3 inflationary periods in the chart above.
Gold is a spotty inflation hedge, as seen. It worked very well in the 1970s, but not at all in the 1980s.
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