Any Happy Returns

Chapter 51968–1982: Inflation and Low Returns

At some point this dam is going to break and the psychology is going to change.

—Paul Volcker

The period from the early 1970s through to the early 1980s was one of the worst decades in history for investors (Exhibit 5.1). The surge in inflation and interest rates, together with two deep recessions and otherwise sclerotic growth, weighed on both equity and fixed‐income markets in an environment of what became known as stagflation. The combination drove a long‐lasting ‘Fat and Flat’ environment of high volatility and low returns for over a decade. The key drivers were a combination of:

• High interest rates with low growth
• Social unrest and strikes
• Collapsing trade, increased protectionism and regulation
• High government debt and lower corporate profit margins

Exhibit 5.1 The period from the early 1970s through to the early 1980s was one of the worst decades in history for investors

NOTE: Shiller price/earnings (P/E) is a valuation measure. It is calculated by dividing the index price level by the average inflation‐adjusted 10‐year earnings per share (EPS).

SOURCE: Goldman Sachs Global Investment Research

After an astonishing rise over the previous 15 years, most major equity markets had reached a plateau in 1966, while in the United States the market peaked in 1968. The bear market that followed was structural in nature: the ...