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Stagflation Revisited? Not Really...


By Sam Stovall

Sam Stovall's Sector Watch

First it was higher energy. Now it's an acceleration in the

consumer price index (CPI). The result is an increase in the number of times I have heard the question: Are we re-entering a period of stagflation?

Stagflation was the name given to the period in the late 1970s when the economy was supposedly growing slowly, while inflation was rising rapidly. Collectors of WIN (Whip Inflation Now) buttons -- popularized by President Ford -- know the period well. As can be seen in the chart below, this period extended from the third quarter of 1976 through year-end 1979.

At first glance, I was amazed because S&P's Chief Economist, David Wyss, knew the exact starting and ending quarters of this era right off the top of his head. He then added that the growth in GDP that we saw in this period can hardly be called "stagnant." The chart again proves his point. In addition, while S&P is currently forecasting a slowdown in economic growth, David reminded me that it is likely to occur over a period of six months, rather than three years.

Regardless of the facts, investors and the media still want to know, "Which industries were the winners and losers the last time stagflation hit, and should I use history as a guide this time around?"

Cumulative

% Changes

Best and Worst Industry Performers

Q3 '76--YE '79

Homebuilding

147.5

Lodging-Hotels

108.3

Aerospace/Defense

99.8

Gold & Precious Metals Mining

96.9

Oil & Gas (Drilling & Equipment)

85.6

S&P 500

3.5

Nasdaq

67.4

Iron & Steel

(50.0)

Truckers

(40.4)

Household Furnishings & Appliances

(39.1)

Retail (General Merchandise)

(38.7)

Beverages (Alcoholic)

(35.5)

Based on the data above, this is one of those times when it might be best not to use history at all, since many of the factors driving share prices back then don't quite make the quantum leap to today.

Sure, inflation may have been a consideration in the 147% cumulative advance for homebuilding shares - since during periods of rising inflation investors favor hard assets over financial assets - but more likely it was that the late 1970s was a period of tremendous household formations for the baby boomers who were in the early stages of careers or child rearing. Next, the S&P Lodging-Hotels Index used to be called Gaming & Lodging. The late 1970s saw the opening of Atlantic City and the expectation of a spread in gambling. Investors, therefore, likely had high hopes for casinos' fortunes in the years before and after this event. And finally, even though the Vietnam War ended in 1975, Aerospace/Defense issues probably did well since the Cold War was alive and well -- and the commercial jet evolution was in full swing.

Only Gold and Oil were the industries that would have come to mind prior to running this screen, since one would have expected them to perform well in a period of inflation brought on by skyrocketing oil prices. The underperformers came from basic materials, transportation, consumer cyclicals and consumer staples -- a motley crew at best -- which says more about shifting consumer tastes than it does an aversion to inflation. At that time, for instance, consumers began to shift from consuming the heavier mixed drinks (scotch and whiskey) to lighter beverages (beer and wine).

So the moral of this story is, don't believe it when someone says: 1) the 1970s saw slow economic growth and 2) that you should use industry performances from that period as a guide, should the economy of today experience a combination of slow growth and accelerating inflation.

Stovall is Senior Sector Strategist for Standard & Poor's


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