Pet rocks. Disco. Polyester. CB radios. Hee Haw. Sideburns. 8-track tape.
In spite of these cultural horrors and technology fossils, the 1970s was a fun time to be a kid, even deprived of a cell phone or X-Box. We played outside until dark, entertained ourselves and generally thrived without helicopter parents. Yet I can still remember the exciting day the new television set with remote control technology was delivered. Ah, the early stages of a fifty-year sedentary lifestyle.
On the other hand, it must have been scant fun to be an adult in the ‘70s. High rates of inflation materially reduced living standards. A major oil crisis in 1973 led to high energy costs and long gas lines. The US unemployment rate was high and the economy was anemic for much of the decade. Racial tension prevailed and Vietnam and Watergate created deep, enduring cynicism about the federal government.
At least they could listen to the absolute best decade of rock music as a distraction from the malaise. Steely Dan, Bruce Springsteen, The Rolling Stones, The Allman Brothers Band, Eagles, Fleetwood Mac, The Who and many others.
Investors suffered for much of the 1970s as well, but the decade sure started with a bang. From 1970-1973, a gaggle of high growth stocks soared in market value. Referred to then (and now) as the “Nifty Fifty”, this band of blue chips stocks were deemed to be “one-decision” investments, meaning they were to be bought and never sold.
They comprised the glamor companies of the day, including Coca Cola, Kodak, General Electric, Texas Instruments and Polaroid. Even K-Mart and Joe Schlitz Brewing Company were members of this elite growth stock group. Interestingly, Wal Mart was also included even though it only listed as a public stock in 1972.
The seeds of the Nifty Fifty stock growth episode was sown in the late 1960s as optimistic investors moved away from “value” stocks in traditional industries to pursue high profile large-cap, blue chip “growth” stocks in droves. Each growth stock in the “index” was a leader in their respective industry with a strong balance sheet, strong earnings and double-digit growth rates.
The growth-at-any-price investor momentum kept rolling into the ‘70s. By1973, the collective Nifty Fifty stock valuations were sky-high as investors were more than willing to pay a fat premium in exchange for good growth.
At its peak, the price-earnings ratio of the Nifty Fifty was more than two times the ratio of the S&P500 Index. Some of the higher-flying stocks were trading at five times the S&P500 market valuation.
An economist once quipped the stock market will keep growing until it doesn’t and then it won’t. The Nifty Fifty stock bubble popped in 1973, spawning a US stock market collapse and a nasty ten-year stock bear market. A Forbes columnist remarked that the Nifty Fifty stocks were “taken out and shot one by one” as many of them saw their stock price cut 50-90% in short order.
Contributing factors to the 1973-74 stock market collapse was the aforementioned oil crisis, rising inflation, falling dollar, rising gold prices and higher interest rates.
By the way, does any of this stock market history ring familiar?
Several of these blue-chip stocks are still viable profitable companies today, but many are not. How about the ridiculous true story about how Kodak invented the digital camera but its executive management team saw no future in it and gave it away, eventually destroying the company. The Kodak digital camera debacle is now standard graduate business school curriculum regarding failed corporate management / leadership.
The stock prices of many of the Nifty Fifty companies took ten years or more to recover to their 1973 value. However, when you consider that inflation rate averaged close to ten-percent per year during the 1970s, it actually took investors much longer to recover their real losses.
The lesson is that investors who ignore fundamental stock valuation metrics are likely doomed to eventually experience financial pain, just like past investors in similar growth-at-any-price market cycles.
Most of us can readily recall the late 1990s tech crash, but that bear market was different inasmuch as it was a speculative mania fueled by a multitude of start-up internet companies with no profits and sometimes no revenues.
Today, I see a visible linkage of the current uber-growth stock darlings – Facebook, Amazon, Netflix, Google, Apple and Microsoft, collectively the “FAMANGs” – to the Nifty Fifty era, not to 1999.
No one disputes the FAMANG mega-tech stocks are great companies. They all are market leaders, but a great company doesn’t necessarily make a great stock, especially when their market valuations get so distended. In my view, that is the current condition of the FAMANGs, who have grown to nosebleed valuations relative to the S&P500 Index while value stocks remain completely ignored.
Unlike the Nifty Fifty growth stocks, however, the bloated market caps of the FAMANGs has been achieved in part by historically low interest rates, free money, their monopoly positions in which they either buy or snuff out emerging competitors and through stock buybacks using cheap borrowed money.
The reality is that FAMANGS cannot grow at exponential rates forever or they will get bigger than the markets they serve. Moreover, do not underestimate the risk of government anti-trust actions in the future that could serve as the final bubble pin prick.
Now, let’s size up our current economic situation: An oil crisis, weak economy, massive money printing, gold prices rising, concerns about a rise in inflation, low confidence in government, high unemployment and a falling dollar. Many of these triggered the 1973-74 stock bear market that “murdered” the Nifty Fifty growth stocks and led to a rotation into value stocks. I’m getting concerned the FAMANGs may get featured in a future Dateline episode as well.
The key take-away is that stock valuation – what you actually pay for a stock’s future earnings growth – has always mattered and it will again in the future. Invest carefully.
Until next time, be well…Tim