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Avoiding a Nasty Blast from the Past

By Sam Stovall It all seems too familiar. An increasingly unpopular and expensive foreign military conflict, rising energy prices, and the threat of higher inflation. These factors, in Standard & Poor's opinion, may be causing investors to question whether the future investment climate may replicate the bad old days of the '70s.

Back then, the Dow Jones industrial average was in the midst of a multiyear bear market that began in 1966 when the index peaked at just over 1,000 after enjoying a 12-year bull market. The blue-chip benchmark then suffered through 16 years of cyclical bull and bear market moves, including the bear market of 1973-74, which turned out to be the worst decline in share prices since the Great Depression. The '70s was tagged by many as the period of "stagflation," in which stagnant economic growth was made worse by rising inflation.

FORTY-YEAR STRETCH. So it's natural for investors to wonder if the investment returns of the '70s will be repeated, and if so, how they should respond. Can investors leverage history to see which sectors should be embraced or avoided this time around?

Perhaps. To help answer these questions, the table below shows S&P 500 sector performances during the four decades from 1959-99. For the purposes of this study, the '70s covers December, 1969, through December, 1979. Sector performances are the average of underlying industry performances, excluding dividends. Of the 107 industries in the S&P 500 as of December, 2001, 77 extend back to December, 1989; 60 to December, 1979; 50 to December, 1969; and 44 to December, 1959.

Index Price Changes by Decade


% Change

1960s 1970s 1980s 1990s

Energy 107 295 135 67

Materials 13 78 243 82

Unweighted Average 88 47 314 284

Utilities 30 43 137 60

Industrials 53 39 297 147

Consumer Discretionary 106 24 414 242

Financial 80 19 169 242

S&P 500 (weighted average) 54 17 227 316

Consumer Staples 160 6 552 258

Health Care 165 1 355 308

Information Technology 368 (13) 171 1140

Telecommunications Services NA NA NA 218

HEDGING ALL BETS. At first glance, it appears that the '70s wasn't a good decade for stock investors in general. It was favorable only to those who invested in select sectors that leveraged the impact of higher oil prices and inflation. The S&P 500-stock index gained only 17% during the entire 10-year span. The unweighted average performance for all industries that decade was a cumulative advance of 47%, again the lowest of the four decades.

The strongest performances were recorded by the energy and materials (chemical, metal, and paper industries) sectors because, in our opinion, investors likely desired "hard" assets that were expected to benefit from -- or not be hurt as badly by -- higher inflation (i.e., inflation hedges) at the expense of financial assets, whose values are usually eroded by rising inflation.

The table below shows the 10 best- and worst-performing industries during each of the last four decades. Initially, it looks as if no industries declined in the '80s, while at least five fell in the '70s and '90s. What can't be seen, however, is that 22 of the 50 industries fell during the '70s, or 44%. Meanwhile, only six of the 77 industries in the S&P 500, or 8%, posted declines during the '90s.

So if you believe history will repeat itself --- though there's no guarantee it will -- you may want to consider investing in such inflation hedges as oil and gold.

Best/Worst Industry Performances

by Decade (12/59-12/99)

1960s % Chg.

1970s % Chg.

Beverages (Non-Alcoholic) 407 Oil & Gas (Drilling & Equipment) 615

Personal Care 378 Gold & Precious Metals Mining 560

Computers (Hardware) 368 Oil (Domestic Integrated) 198

Oil & Gas (Drilling & Equipment) 214 Aerospace/Defense 157

Broadcasting (TV, Radio & Cable) 187 Entertainment 145

S&P 500 54 S&P 500 17

Retail (Food Chains) 3 Consumer Finance (32)

Paper & Forest Products 2 Textiles (Apparel) (34)

Chemicals (33) Trucks & Parts (38)

Aluminum (38) Personal Care (42)

Iron & Steel (52) Beverages (Alcoholic) (59)

1980s % Chg.

1990s % Chg.

Waste Management 1103 Electronics (Semiconductors) 2360

Broadcasting (TV, Radio & Cable) 935 Computers (Software & Services) 2072

Tobacco 810 Communications Equipment 1607

Beverages (Alcoholic) 776 Electronics (Instrumentation) 1104

Foods 702 Retail (General Merchandise) 701

S&P 500 227 S&P 500 316

Computers (Hardware) 43 Services (Commercial & Consumer) (10)

Homebuilding 43 Truckers (18)

Iron & Steel 26 Gold & Precious Metals Mining (45)

Oil & Gas (Drilling & Equipment) 16 Oil & Gas (Exploration & Production) (57)

Banks (Major Regionals) 11 Waste Management (58)

Industry Momentum List Update

For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of May 21, 2004.




Recent Price

Casinos & Gaming/Consumer Discretionary

Harrah's (HET)



Catalog Retail/Consumer Discretionary

Insight Enterprises (NSIT)

Not Ranked


Communications Equipment/Info. Tech.

Cisco Systems (CSCO)



Consumer Electronics/Consumer Discretionary

Harman International (HAR)



Diversified Metals & Mining/Materials

Peabody Energy (BTU)



Home Ent. Software/Info. Tech.

Electronic Arts (ERTS)



Internet Retail/Consumer Discretionary




Internet Software & Services/Info. Tech.

Yahoo! (YHOO)



Oil & Gas Refining/Mktg./Energy

Premcor (PCO)




Nucor (NUE)



Technology Distributors/Info. Tech.

Avnet (AVT)



Wireless Telecom Svcs./Telecom Svcs.

Nextel Communications (NXTL)



* S&P's stock appreciation ranking system for the coming 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is chief investment strategist for Standard & Poor's

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