As I recall the 1970s, there were many reasons to think that society was falling apart. The decade burst into being with an outbreak of violence in Quebec, blasted complacency with Richard Nixon's resignation and then smacked us with runaway inflation. Mix in disco and you have an era many of us wince to remember.
So maybe I should be grateful we are now in the anti-'70s, a period when the dominant economic and political themes of my teenage years are reversed. Somehow, though, I suspect the 2010s won't shine in memory either—at least, not from an investor's perspective.
One of the biggest challenges for both decades has been the impact of baby boomers. During the 1970s, boomers poured into the labour force, helping to create stagflation. Fast-forward 40 years and those same workers are starting to flood out, helping pull down the potential growth rate of the economy.
Perhaps as a result, prices are now headed in the opposite direction. Inflation was the bogeyman of the 1970s; deflation is the villain of the 2010s. The 1970s were the decade of soaring energy prices and all-powerful OPEC. The 2010s have been marked by OPEC's fading power and by the recent crash in oil prices.
For investors, these developments raise fundamental questions. The 1970s were a generally miserable time for stock markets, but set the stage for big gains in the 1980s. Are the 2010s—wonderful so far—setting us up for a big letdown in the years ahead?
One reason to think so is valuation. Stocks are trading at lush multiples of their long-term earnings, as measured by the so-called cyclically adjusted price-to-earnings ratio (CAPE). This ratio has been a decent predictor of future returns, and right now it's suggesting that gains over the next few years will likely be paltry.
There is also a growing wariness among professional investors. Capital Economics, a respected research firm, thinks the Standard & Poor's 500 Index will finish this year at 2,100—pretty much where it stands now—and only inch ahead in 2016. GMO LLC, a much-followed investment manager in Boston, sees both U.S. and international stocks as a fine way to lose money over the next seven years.
The pros are fond of observing that this bull market has been the most hated rally in history. It's been fuelled by the low, low interest rates engineered by central banks in the wake of the 2008-09 financial crisis. The capacity for further monetary stimulus is limited.
If rates stay low, it would be because the economy is sputtering, which is not good for stock prices. But if interest rates and bond yields move up because of an improving economy, bonds will offer more competition for investors' dollars. That should limit further stock gains.
One lesson from history is that sometimes investors get paid well to take risks, and sometimes—like now—they don't. That's not to say a crash is imminent. However, remember that stocks have climbed in recent years despite a lacklustre economy. It would be no big surprise if the situation flips over the next few years, and the market stagnates as the economy improves.