I remember years ago eating lunch with my father and his financial
advisor. I stated what I thought was an indisputable fact. I said history
suggests that stock markets can not only go down but stay down for many,
many years. I cited the 1966 top in U.S. stocks and the secular bear
market that ensued and lasted until 1982. He asked me if I was
recommending that investors bet against America.

I said I wouldn’t put it that way. I explained that the world was
moving toward an era of energy scarcity, and that since energy is the key
factor in economic activity, this could affect the value of stocks. Even
if he disagreed, I said that none of us live as long as the stock market
has been around and so it seems worthwhile to know about this history of
long-term bear markets that might affect our very finite financial lives.
He was unruffled.

I turned out to be right about energy costs; the price of oil hit a new
record in 2008. But he turned out to be right about the general direction
of the U.S. stock market, even if you count the crash of 2008 from which
we more than recovered before going on to ever more unsustainable heights. My father was very pleased with the results of
this man’s advice.

By the way, you really have to look around for charts of major U.S. stock
indices that include the entire period I mentioned in my conversation. I
looked up a popular gauge of the U.S. stock market, the Dow Jones
Industrial Average. The Yahoo
Finance chart only goes back to 1992. The popular MarketWatch
site has a chart that goes all the way back to 1970. The venerable weekly
financial publication, Barron’s—which
ought to have a sense of history since it’s been in continuous publication
since 1921—only goes back to September 30, 1970, not quite as far as
upstart MarketWatch. The charts in MarketWatch and Barron’s make it appear
that stocks more or less went sideways in the 1970s which was not how it
seemed to someone who was invested at the time.

To get a real sense of what happened from 1966 to 1982 in the U.S. stock
market it’s helpful to have two things: A longer term chart and the
cumulative inflation rate for that period.  I like the following 100-year
chart of the Dow Jones Industrial Average because it allows the user
to contract it to cover just the period you want to look at. If you do
that, you’ll see that the Dow Jones average bounced between about 1,000
and about 600 for the entire period.

Okay, you say, that’s not a good look, but investors who held stocks
received dividends. That’s true. But when we add the other piece of
information that I suggest is crucial, cumulative inflation, dividends may
not seem all that significant. According to the Consumer
Price Index Calculator (found on the site of the U.S. Bureau of
Labor Statistics) from January 1966 to August 1982—the putative starting
and ending months of the secular bear market—cumulative inflation in the
United States was 207 percent. That means that the purchasing power of a
stock portfolio tracking the Dow Jones Industrial Average went down by
about two-thirds during this period and possibly more depending on when
you bought in. In other words, you could only buy about one-third of what
you bought in 1966 in 1982, and certainly less if you sold nearer to the
bottom.

The puzzling resilience of stocks since 1982 is in part due to an error
of perception and in part to what appears to be a
deliberate policy on the part of governments to keep stock prices high
by bailing out the financial sector of the economy every time the economy
has wavered. The error of perception is that few people realize that
stocks essentially made no upward progress from August 1998 through
February 2009. There was ups and downs, but no new highs in the Dow until
2013.

Since the great financial crash in 2008, governments and central banks
around the world seemed to have made it their priority to keep stock
prices elevated. This has been good for one-way financial advisors and
Wall Street prognosticators who stay forever on a bullish note. And it’s
been great for the wealthy who own the lion’s share of stocks.

Those who are longtime readers know that I am skeptical that the world
economy can continue to grow much if at all as resource constraints and
the constraints of the complex, energy-intensive systems we rely on place
limits on our economic output. I rather envision a period that looks more
like the 1970s than the recent past: high inflation and economic
stagnation resulting from dwindling resource growth and even contraction
in some cases as the ravages of climate change continue unabated. I expect
most basic commodities we require will generally continue to rise in price
as they have of late.

Of course, we might very well face another financial crash as a result of
these constraints and because of the enormous financial leverage in the
world financial system, in other words, too much borrowing by households,
corporations and speculators. Such a crash would tend to bring down
commodity prices as economic activity declines. But this path to lower
prices is not one that favors a rise in stock prices.

Regarding this scenario, I’ve been for some time premature in calling for
its arrival. But now I see circumstances lining up in a way that suggest
my wait won’t be much longer. If I’m right, the reaction of the world’s
governments and central banks to a serious economic downturn will be to
attempt to revive the economy with bailouts and new government spending
that will likely dwarf what we saw during the COVID crisis. But with
resource and infrastructure constraints bearing down on the world economy,
such measures may not prove nearly as effective except in one regard. They
are likely to cause inflation that is as high or worse than what we
experienced in the 1970s.

Kurt Cobb is a freelance writer and communications consultant
who writes frequently about energy and environment. His work has appeared in The Christian Science Monitor, Resilience, Common Dreams, Naked Capitalism, Le Monde Diplomatique, Oilprice.com, OilVoice, TalkMarkets, Investing.com, Business Insider and many other places. He is the author of an oil-themed novel entitled Prelude and has a widely followed blog called Resource Insights. He can be contacted at kurtcobb2001@yahoo.com.

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