Each day most of us see charts and graphs that show the stock market as moving up and down in no obvious direction. The easy conclusion is that nothing is happening to entice investors to want to buy stocks. The long term Chart below shows a slightly different and, we believe, a more useful picture. Two exceptions to the long term upward trend stand out, and it is important for stock investors to understand both. The first was the 1960-1980’s flat market as inflation was rising sharply, seemingly out of control. The second was the tech boom that pushed stock prices to unwarranted highs in the late 1990’s.
Regarding the first exception, it is instructive to note that the stagnating share price pattern coincided almost exactly with the rampant rise in inflation – and the weakening confidence within financial markets that it would or could be checked – lest the U.S. begin to look like a very large banana republic. The Dow Jones Industrial Average peaked above the 1000 mark in the 60’s but it took almost two decades before investor confidence was restored sufficiently to allow share prices to finally move back above that mark. Some today are apparently, but wrongly, fearing a repeat of that experience. We say this with confidence because it is now nearly impossible for inflation to move out of control in the modern world where world monetary leaders closely control currency exchange rates.