"Figures often beguile me, particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice and force: 'There are three kinds of lies: lies, damned lies, and statistics.'" – Mark Twain, Chapters From My Autobiography
It is the latter part of this quote that gets the most attention, but the lesser quoted preamble merits some discussion as well.
“Figures often beguile me …”
Yes. Yes they do – and today I am beguiled most particularly by the present location of an icon of the 1970s and early 1980s in the world of figures -- the “Misery Index.” Some of you may remember it – it is a simple statistic, created to be an extremely short-handed evaluation of the unhappiness caused by the economy. It is simply the unemployment rate added to the inflation rate.
The Misery Index gained profile during the candidacy of Jimmy Carter (a man not known for projecting or encouraging misery), and he used it with great effect against his rival in the 1976 presidential campaign. The index was then in the low teens, having come down from a peak of 19.9% shortly after Gerald Ford took office. Nevertheless, something in the low teens still seemed too much to the electorate, and Carter won fairly easily. However, Carter’s own Misery Index peaked at 21.98% in June 1980, as the next election was in full swing. Carter was hoisted by his own petard and lost in a landslide.
Those numbers are worth keeping in mind as we contemplate a current economy frequently referred to in less than glowing terms, and in light of a market that has recently turned hostile on the bulls. Currently, the Misery Index stands at a scant 5.3%, with the latest unemployment figures coming in at 5.1% and inflation at a mere 0.2% for September. That’s the lowest the index has been in 60 years, going back to the spring of 1956. That’s the time – this is literally true – that the end of the first season of the iconic show Happy Days is set. Happy Days first aired in 1974, when the Misery Index was just gaining notoriety.
Now, I wouldn’t argue that the happiness of the days enjoyed by Richie, Fonzie, Potsie, Mrs. C, et al., was primarily defined by a combination of the era’s low unemployment and inflation rates. (I do not recall any episodes where the gang discussed macroeconomic factors over shakes and fries at Arnold’s.) That would fall into the kind of “damned lie” use of statistics, but, you know, the mid-’50s are remembered as being pretty good economic times. Will sitcom creators of the 2030s (assuming there is still such a thing as a sitcom then) look back on today’s era as being especially mirthful? Even for carefree high schoolers? I know they’d have a hard time selling that idea to the speechwriters of today’s presidential hopefuls.
Ironically, the problem with today’s Misery Index reading is that, in the estimation of some important policymakers – it is too low. Inflation, at a fraction of 1%, is not high enough. Anything substantially short of the Federal Reserve’s target rate of 2% inflation (i.e., “healthy inflation”) is putting a brake on raising interest rates and is the current bugaboo of our economy, believe it or not. This makes enough sense – a healthy rate of inflation of around 2% is the way to tell that the economy is properly employing the labor force and capital available. (Check your Econ 101 books for chapter and verse.) The forceful deflation present during the Depression, the mild deflation of the Great Recession, Japan’s stagnation over the past 20 years – there’s plenty of historical and recent evidence on hand to demonstrate that we do want more inflation than we’ve got. But the economy does have a little inflation – just not enough – so it would be easy to chalk this up as a First World problem. Check with nearly anywhere else in the world for more significant economic problems.
So … Happy Days ahead? And even if so from an economic perspective, should that translate into happier days for investors than those we saw in August and September? Here we enter squarely into the territory of “you can use statistics to prove anything you want.”
1956 itself was a fairly tepid year for investors, with the S&P 500 returning 6.4% nominally and 3.3% after adjusting for inflation. 1957 was a downright poor year for stocks, with investors getting negative-9.3% returns nominally and negative-11.3% adjusted for inflation. So working off that one data point – the immediate future measured by stock-market returns over a limited period – the last time our economy was this low on “misery,” investors fared poorly over the short term. Low inflation plus low unemployment is not a recipe guaranteed to deliver short-term stock-market joy.
Those muted returns were in part the product of digesting the great returns that the market provided from 1949 to 1955, a seven-year period with average annualized returns of 24%, benefiting from the stocks’ historically low price-to-earnings ratio of 5.8. After the two-year pause of 1956-7, the eight years that followed were delightful for investors, showing 13% compound annual growth over the 1958-65 period. So, long-term, 1956 was squarely in the middle of two decades of very happy days for investors, though it may not have seemed that way at the time.
Today’s domestic market is faced with the process of digesting the 17.3% annualized returns from 2009 to 2014 – a time of a moderately expanding economy that was rebounding from a far less depressed starting point for stocks, which has left the market at a somewhat elevated valuation level by historical standards. Of course, no one can know where the market is going to go. And in drawing any parallel with the last time the Misery Index was at this level, I’m not predicting a repeat of history. Neither stagnant to declining market prices over the short term, nor longer-term impressive market returns, are necessary, nor are they indicated by anchoring on one data point from the past and projecting it forward.
Looking at today’s Misery Index is a reminder that the economy isn’t decidedly in trouble, and looking back on the last time it (kind of) looked like today, we can see that the market didn’t keep going up, nor was it a bad time to stay invested. I wouldn’t put up any stock from 1956 as a useful guide to stock-market conditions going forward, as today’s prices are too elevated compared to the levels back then to offer any margin of safety. However, bear markets do not start merely as a product of higher valuations – a trigger such as a war or a declining economy is almost always necessary. The rough patch for stocks in August and September is, so far, merely a reminder that stocks can always take a break from a great run even in decent economic times. But more severe declines don’t have a history of starting in times that look a lot like today.
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