Russia is invading a neighboring country. Oil Prices Quadruple. Manufacturing shortages abound. The Fed is preparing to raise rates several times to fight double digit inflation.

1979’s headlines sound familiar, don’t they?

The rising cost of everything seems shocking after our recent 10-year stretch of low inflation, oil prices and interest rates. However, President Truman once said “The only thing new in the world is the history you don’t know”. With familiar headlines, it’s no wonder investors are worried about a repeat of the 1970s economic disaster known as Stagflation.

From an investment standpoint, that decade wasn’t a great one. It’s the only decade on record where cash (+6.3%) outperformed bonds (+5.4%) and the S&P 500 (+5.8%). All three asset categories did see modest dollar gains, but lagged inflation at the time, which means the “real” returns were still negative.

Investors are understandably asking if they’re at risk for another lost decade. Context is key when drawing parallels to the past though. So, cue up the Saturday Night Fever soundtrack and we’ll look at what’s the same and what’s a key differentiator between the disco era and today.

Inflation just reached a 40-year high at 7.9%. 2022’s rapid reopening accelerated demand for everything and pulled wages, materials, and product prices to new highs.

During the 1970’s, inflation was 8% or higher 4 years out of 10. The economy was also in a tough spot as the average unemployment rate remained above 6%, and household net worth fell 10% through the decade.

Having low savings and a lousy job certainly makes inflation hard to keep up with.

What makes today different is the average American is far better off than they were back then. Current unemployment sits at 3.6% with twice as many job openings (10 million) as applicants (5 million). Wages are at all-time highs and rising. Meanwhile, US household assets are at all-time highs, while personal debt is at 20-year lows.

Inflation hurts less when people have cash in the bank alongside growing income.

Chipotle’s recent earnings call rolled up the fact that consumers are more than willing to bear higher prices: “we’ve had to raise prices at a faster clip than we have in the past… (but) when we’ve raised prices, we’ve not seen any resistance.”

Before we conclude that rising prices are always bad for markets, let’s remember the 80’s had average inflation of 5.5% per year, yet the S&P 500 grew over 13% during that period.

If we zoom out further, since 1926, stock prices have risen around 6.5% above the inflation rate.

Inflation is a feature, (not a bug) of a productive economy. As an investor, owning the companies which are raising the prices tends to be an effective way to protect and grow your purchasing power.

Datasource: Macrotrends.net, thebalance.com, JP Morgan