American life in the 1970s was marked by the massive inflation caused by the Oil Crisis in the Middle East. An oil embargo was placed on the United States in 1973 by OAPEC, the Organization of Arab Petroleum Exporting Countries, due to American involvement in the Yom Kippur War. This oil embargo caused a dramatic drop in the supply of fuel and sky-high prices throughout much of the decade. The result was much more than lines for car gasoline that spanned miles. This embargo played a major role in contributing to a crash in the stock market and inflation that plagued the 1970s. This series of events, however, gives us the opportunity to understand the reasons for the recession and learn important investing lessons to prepare oneself in times of economic instability.
The U.S. economy was already weak to begin with before the oil crisis. Stagflation, a term that combines “stagnation” and “inflation,” was already occurring in the U.S, meaning that rapid inflation was present while economic growth was stagnant and unemployment was high. There are a couple explanations for stagflation, one of them being that there is too much money in the economy and too little supply of necessary goods. To keep this inflation down, President Nixon imposed price and wage controls in 1971. The result was a 90-day freeze on wages and the prices of goods. On that same date in 1971, Nixon also halted exchanges of US dollars for gold, as it drops the value of the dollar. When the dollar’s value drops, it causes inflation since it requires more dollars to buy the same good or service. Once OAPEC embargoed the United States, it caused an already weak economy to go into a recession.
In addition to the inflation, the Dow Jones Industrial Average lost about 45% of its value from 1973-1974. Investors learned that inflation coupled with high unemployment was a deadly combination. In 1972, the year before the drop, the stock market returned about 15%. Few analysts would have predicted the drop that followed the year after, which shows that it is more important to look at the economy rather than previous stock market returns. This period also highlighted the important role the Federal Reserve plays in investing as they control the money supply. They increased rates in the late 1970s to levels that were never seen before. The end to this inflation came after two events: another recession and large rate increases by the Fed which reduced the amount of money in circulation.
“Those who cannot learn from history are doomed to repeat it.” At Fogel Capital Management, we take great pride in revisiting history and analyzing causes and effect. When considering market history, we forget how complex causes of recessions can be. To protect yourself from recessions, a professional needs to manage your portfolio. For over 20 years, Fogel Capital Management has managed high-quality portfolios with your risk profile and needs in mind. For a free consultation, call us at 772-223-9686.