You’ve heard the old story about the soothsayer who says, “The end of the world is nigh.” It’s never clear when “nigh” is, but in any event, it’s very soon. When challenged by his neighbors why the world was still intact after a few days, he replies, “just you wait!”
That’s sort of the way I felt a couple of weeks ago when the partial federal shutdown started. It only ended after a great deal of friction between the parties.
Here are a couple of headlines from The Wall Street Journal: “Deep Divide Lingers After Impasse Ends” and another on an article about the tension between the parties, “Behind the Scenes, Silence, Distrust And Hardball.” Then, from The New York Times: “From the Right, Despair, Anger And Disillusion.”
After reading about the nastiness all last week, I concluded that it would have to rub off on the market. We were witnessing an eruption of ill will that was more extreme than usual, and should have been enough to move the market.
The bad feelings were not just among congressmen. Rather, it seemed to be a reflection of disappointment among conservative loyalists that the Affordable Care Act was not defunded, and at least modest elation among liberals that they were witnessing a revolution. I think it’s safe to say that usually, but of course, not always, the initiation of a new, major, liberal program will result in a weak market.
Looking back to the 1970s, you may recall that when President Richard M. Nixon took us off the gold standard, long a goal of many Democrats, the market was hammered. To make matters worse, price controls were imposed on the economy, which was poison for conservatives. I remember seeing President Gerald Ford wearing a “WIN” button. What did “WIN” stand for? Why, ”Whip Inflation Now,” of course. Back then, investors were discouraged by the 12 percent (or higher) inflation, and maybe even more so by the remedies coming from Nixon and Ford. Those were the days when the market, already very weakened by the Arab Oil Embargo of 1973, got no help from the economy.
Forgive the brief math lesson, but 12 percent inflation would mean that prices would double every six years.
When I mention prices, I’m not talking about stock prices, but consumer goods and services, plus industrial commodities. What didn’t work at all as a hedge against inflation was gold, silver and other precious metals. But, as you know, commercials for gold and silver as protection against a falling dollar were useless. In fact, years later, the dollar was quite strong as gold and silver still languished near the bottom.
However, I still can’t figure out the behavior of last week’s market. Then again, maybe I should remember another old saying: “The market goes up when it’s climbing a wall of worry.” Besides, we still have record-low interest rates.
This is not so much a warning, but merely a description: If we see signs of inflation, the Fed and commercial lenders will raise interest rates, which might just fuel even more inflation, and certainly lower stock prices.
Bud Stevenson, a retired stockbroker, lives in Fairfield. Reach him at Bsteven254@aol.com.