Bear Markets: 1973

There tends to be a lot of fanfare with round numbers. Milestone birthdays and anniversaries are always celebrated when they have a zero-in-tens place; 30, 40, 50, 60, etc. No one seems to give too much attention to their 43rd birthday. The same can be said with the stock market. In December of 2018 when the Dow Jones Industrial Average reached 25,000 for the first time much excitement and optimism was on display through many media outlets. In January of 1966, the Dow flirted with 1,000 (another symbolic number), which was unthinkable 20 years earlier when the country was emerging from the Great Depression. What many could not have predicted in 1966 is that the index would cross the 1,000-mark intraday 4 times over the next 6 years without actually closing above it. In fact, it wouldn’t be until November 14, 1972 that the Dow would close above 1,000 at 1,051.7. However, starting in January of the following year the market would experience one of the worst and chaotic bear markets in our country’s history. By the end of 1974, the Dow would sit at 577.

The bear market of 1973 was a decline of 48% on the S&P 500 over 21 months starting in January of that year until September of 1974. It is considered one of the worst times in history for stocks not only because of the nearly 50% decline but because it wouldn’t be until August of 1980 before prices returned to their pre-crash levels. The 57% decline in 2008 took 4 years to get back; 1973 would require just shy of 6. The early 1970’s was not just a volatile year for stocks, but it was also a tumultuous time politically. Between the increasingly unwinnable War in Vietnam, an oil embargo from OPEC and the Watergate Scandal, the US was having trouble showing stability abroad and at home.

As is the case in any bear market, it is usually fear that pushes investors into terrible investment decisions. The bear market of 1973 had some very eye-popping headlines that were accompanied by steep declines in stock prices. The summer of 1974 was particularly precarious. On August 8th Richard Nixon became the first president to resign from office, and the S&P 500 finished that month down 12%. The crisis was made worse by the fact that Nixon’s original vice-president, Spiro Agnew, also resigned from his office due to corruption charges. To say that the American people had lost faith in their government would have been an understatement.

The Watergate scandal was a constitutional crisis that played out in the courts and congress. It did not directly affect the economic wellbeing of taxpayers. However, there was another crisis being dealt with that impacted almost every person and busines in the US. This came to be known as the Oil Crisis of 1973. In retaliation for America’s support of Israel in the Yom Kippur War, OPEC used its “oil weapon” and shut off all exports to the US. The oil embargo began in October of 1973 and lasted until March of 1974. During that short time the price of oil rose nearly 400% from $3/barrel to $12. Long lines at gas stations became the norm and in February of 1974 20% of stations were completely out of fuel. Two months into the embargo the S&P 500 was down 14%.

As if Watergate and the oil embargo weren’t enough to spook investors, the United States was also experiencing a currency crisis in the early 1970s. In 1971 the Nixon Administration announced that The US Treasury and Fed would no longer exchange dollars for gold. American citizens had lost this privilege in 1933 but now other country’s central banks could no long get gold for dollars. In fact, the purchasing power of the dollar was sinking fast. In the years 1973 and 1974 US inflation registered at 8.7% and 12.3% respectively. The cost of living was soaring, and the stock market was tanking.

The S&P 500 bottomed on September 30, 1974 and it would be a long road to recovery. Inflation would again rear its ugly head in 1979 and 1980 with the consumer price index toping 12% in both years. The market would return to its pre-crash level in July of 1980 only to start another bear market four months later.