Advisors debate whether economy will return to that '70s show

Is the American economy destined to rerun that ‘70s show? 

That’s the parallel some advisors are seeing due to higher energy prices, sticky inflation and political turmoil both domestic and international. The question they are now asking themselves is if they should base their investing strategy based on what worked, and didn’t work, back in the days of disco.

Nate Garrison, senior vice president and chief investment officer for World Investment Advisors, believes the 1970s are the closest recent parallel to the current environment, given the combination of oil shocks, stagflationary pressures, and geopolitical turmoil.

“It was painful, but we got through it eventually as the economy adjusted. Looking even further back, history offers many moments when it appeared the world was falling apart. But it didn’t, and that long track record of resilience is worth remembering,” Garrison said.

Garrison says he was way ahead of the curve, having told clients a long time ago to prepare for change. Recently he informed clients that the next 15 years will look very different from the last 15 years.

“While a multipolar world with shifting economic and trade blocs seems likely at this point, the structure of that world, and the relative winners and losers that shake out from the reordering, remains highly uncertain,” Garrison said.  

When investing in environments like this one, Garrison emphasizes deep and broad diversification across and within asset classes. Rapid geopolitical and economic shifts make it difficult to identify clear winners, so he thinks maintaining prudent balance is “essential and wise.”

And so is maintaining additional cash on hand because it provides “option value.”

“If markets fall but the world doesn’t end, that cash provides you the option to buy risk assets at more attractive prices. If the world truly ends, then every financial asset, including cash, is a ‘zero’ anyway. However, I do not recommend moving entirely to cash. Once today’s extreme uncertainty eases even slightly, risk assets could rebound sharply, particularly equities,” Garrison said.

Likewise, Jesse Kurrasch, chief operating officer with The AmeriFlex Group, is looking to the 1970s as an economic reference because the “oil impacts are similar.” In his view, the conflicting messages across the market and economy are cause for concern, but he does not see the need for an entirely new investing approach.

“The country is at war, spending billions a week, facing what seems like an intractable fight about funding the government and significant questions about private credit stability. These indicators require us to be honest about what they mean. Just because we don’t like what the fundamentals say doesn’t mean they aren’t telling us the truth,” Kurrasch said.

Pete Alliegro, Chief Investment Officer for Sagient, says fundamental assumptions are changing, especially around interest rates and inflation. No rate cuts this year certainly seems possible now and inflation could certainly be worse if oil prices continue to rise and stay high in his opinion.

As to how he plans to weather the possible storm, Alliegro recommends keeping things “boring” by staying diversified.

“You never know what’s going to happen tomorrow, especially in times like these,” Alliegro said, adding that high quality bonds and treasuries can serve as safe havens for anxious clients.

Finally, as for historical parallels, Alliegro says it’s important to remind clients that the economy and stock market have weathered all types of shocks rather than focus on the most similar events.

“Covid and Russia’s invasion of Ukraine are the easiest to discuss because they were so recent,” Alliegro said.