Perhaps you are old enough to remember the 1950s, a decade characterized by US dominance, technological innovation, and rapidly increasing wealth among the middle class. It was also a period of rising interest rates and robustly appreciating stock prices. I humbly submit that the current decade looks, and may continue to look, a lot like the 1950s.
Comparing the 1950s and the 2010s
There are several parallels between the American economy in this decade and in the 1950s. Back then, the world was still healing from the most severe depression and financial crisis in centuries, while simultaneously rebuilding from WWII. The US, along with other developed nations, had accumulated unprecedented levels of debt to finance the war and needed to pay it down to more manageable levels. Meanwhile, the Federal Reserve was keeping interest rates artificially low, with 10-year Treasuries pegged at 2.5%.
Sound familiar? Today we’re only four years out from the Great Recession, have massive government debt, and enjoy ultra-low interest rates courtesy of the Federal Reserve. Rates bottomed last May and have risen fairly consistently since. Rather than rolling over in the face of higher interest rates, the stock market has surged, rising over +15% during the same period.
Interest rates rose fairly persistently during the 1950s: for example, the interest rate on 10-year US Treasuries doubled from 2.5% to nearly 5% between 1950 and 1960. At the same time, US stocks rose +482%, or an average of +19.3% per year, thumbing their noses at higher interest rates. It was one of the best decades for investors ever. Could the 2010s produce a similar result?
Graphing total returns
Before we look at total return graphs of the 1950s and the 2010s, it’s important to differentiate between price return and total return. Most indexes, including the S&P 500, only track price return, or what an investor makes from changes in stock prices only. But most stocks also pay dividends, and over time these account for a meaningful portion of stock investment returns. Total return indexes, which we are using below, include the return an investor would have received from both price changes and dividend payments, and assume that these dividends are immediately reinvested in the same stocks that paid them.
In the first graph below, we show the total return of the S&P 500 from January ’50 to January ’54 and from January ’10 to January ’14. The total return from 2010-14 (+81.18%) falls a bit short of the 1950-54 return (+90.61%), and their trajectories are by no means identical, but it’s worth noting the incredible performance over both periods given how dreadfully the market did in the periods that preceded them.
*Note: To make the returns from each period comparable, we indexed both January 1950 and January 2010 to a level of “1”—so you can interpret the graph as $1 invested in January 1950 or January 2010 would be worth $X at whatever point in time you choose.
If you think the market was on fire between 1950-54, you’ll be blown away by 1954-60. Below we have indexed the entire decade from 1950-60, again starting at a level of 1. Notice that the performance from 1954-60 was so good that it makes the growth we just experienced over the past 4 years appear almost insignificant.
Could the same thing happen over the next 6 years? Though history never exactly repeats, it does rhyme, and the parallels are compelling. I personally believe that the risk of missing out on a fantastic decade greatly exceeds the risk of losing your shirt. Of course, we’ll know for sure in 2020.
Dr. Ken Waltzer MD, MPH, AIF®, CFA, CFP®
Founder and President – Kenfield Capital Strategies (KCS)
Director of Business Development – Kenfield Capital Strategies (KCS)
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