I have consumed more political news in the past 18 months than I did in my previous 51 years on this planet. I know I am not alone in getting drawn in to the events that led up to the U.S. Presidential election and the subsequent barrage of news, views and accusations from all parties and the media. My interest is driven primarily by my position as someone managing other people’s money. I recognize that current events combined with instantaneous global communication have made it so that politics have a stronger potential correlation with events in the stock and bond markets than at any other time in our lives. Furthermore, I strongly believe that human behavior at the core does not change much from decade to decade.
So, with all the talk lately about the Watergate scandal of the 1970s, I decided to take a look back at that period and see how the U.S. stock market (represented by the SP 500 Index) responded to the gradual recognition of an election scandal. I leave it to you to determine how relevant this is to today‘s markets. I have no desire to inject politics into this, I am just looking for correlating patterns of news and market reaction.
Below is a chart of the SP 500 from the start of 1972 through the end of 1974. In the last of those years, the U.S. entered a deep recession, likely due to falling confidence and an OPEC-induced spike in energy prices. And while we are only in the early stages of the potential current version of the events of four decades ago, as investors we should have always been adding to our data bank of market history, to better understand what alternative outcomes to plan for.
Below the price graphs is a nice timeline (from Wikipedia.com) of key events before, during and after the Watergate situation dominated the country’s attention back in the early 1970s. This allows you to see how the market reacted to the evolution of the crisis.
The graphs show the market’s decline in both index level and percentage gain/loss terms. If you want to put that data into terms more relevant to today‘s market, the math is pretty easy. The SP 500 peaked in January of 1973 around the 120 level. The SP’s recent high was about 20 times that, or about 2,400. By October of 1974, the SP had fallen to just over 62, or nearly one-half its 1973 peak. That would be like the index falling to around 1,250 today. This is pretty typical for a bear market. The bears that began in the year 2000 and again in 2007 also resulted in the SP 500 being cut about in half.
This is a time when I emphasized awareness and diligence in comprehending market reward and risk potential, as opposed to making some dramatic shift in strategy. I just do not want to see my readers wake up one morning and realize that they did not properly prepare their portfolios for anything other than a continuation of the current environment. I welcome your questions, thoughts and ideas at firstname.lastname@example.org. None of us know the future, but risk can still be managed to help you sidestep those occasional situations that can cause your retirement lifestyle to be thrown way off track, despite otherwise prudent planning.