Contrary to our collective memory, inflation was not stable during the 1970s.
From 1962, inflation rose from a fairly stable 2% to a peak of 6% in 1969. That rise triggered the Fed tightening cycle that caused the 1970 recession. Inflation fell as it usually does during recessions but came back with a vengeance in 1974. Inflation rose quickly in from 3% in late 1972 to 12% in 1974. In total, there were 3 massive waves of inflation during the 1970s, 3 Fed tightening cycles, 3 recessions and 3 major bear markets.
Is it possible the Fed will replay this script over the next few years? Yes, because the enabling behaviors are the same:
1. Reluctance to hurt economic growth by raising rates to high.
2. Assuming supply chain and not monetary policy created current problems.
3. Relative stability of long-term Treasury yields encourages only moderate tightening of policy early in the inflation cycle.
I hope I'm wrong because this conclusion means several hard years ahead for our country.
On a more mundane level, have you thought about what this means for your portfolio strategy? We have. Call us to discuss your situation and our view.
Robert Lloyd, CFA®
Chief Investment Officer
Lloyds Intrepid Wealth Management
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