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Will History Repeat? Fed Policy and a Multi-Year Equity Rally

September 2013

Simon Derrick

Chief Currency Strategist, BNY Mellon

Is This the '80S All Over Again for U.S. Equities?

If Simon Derrick is right, another multi-year rally in equities — similar to the one we saw in the United States in the early 1980s — is about to begin again. Why does Simon, BNY Mellon's market strategist, think so? As it turns out, he's noticed three things about the '70s and '80s he believes are significant for our times:

  • In the 1970s, Fed policy trailed headline inflation in the United States.
  • The dollar went down, commodity prices went up and "equity markets had an extremely volatile time, but didn't necessarily go anywhere," says Simon.
  • Then the Federal Reserve appointed a new chairman, Paul Volcker, who worked tirelessly through a deep recession to bring down inflation.

How did markets react? In the end, the dollar went up, gold and commodity prices came down, and U.S. equities entered a rally that lasted a good 20 years.

Pattern Emerging

Simon has seen a similar pattern developing over the last decade, where we have higher gold prices, a lower dollar, and a volatile market in equities that has gone nowhere in particular. All that's left to complete the picture for him is a more conservative view of inflation at the Federal Reserve.

He may just get his wish. It was something Ben Bernanke, the current chairman of the Federal Reserve, said in a speech back in May: Fed Policy may have played a role in allowing the U.S. economy to form asset bubbles. To Simon, the chairman seemed to suggest the Central Bank would be taking a more conservative view of inflation going forward.

"At the very least," observes Simon, "(Bernanke) seemed to foreshadow the end of the asset purchase program that's been taking place, what's now being talked about as 'tapering.'" In the end, a more conservative Fed returns us to the model of the 1970s. Simon Derrick does not believe this would be a bad thing for U.S. equity markets.

All information as of July 2013

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