Recently, a movie was released about the life of Bob Dylan. For those of us born in the 1950s, it was a reminder of our childhood. Our early formative years were filled with cultural changes illustrated by music and fashion. Attitudes became more adventurous and expressive. Short skirts, psychedelic colors, and long hair were the new fashion. Pop music shifted from large bands to smaller groups using electric instruments and loud amplifiers. Movies like The Endless Summer and Easy Rider were iconic reflections of this counterculture.
While the new culture was seen as rebellious and non-conforming, a lesser known but equally dramatic shift was taking place in the stock market. The 1960s not only had go-go dancers but also go-go fund managers. Fred Carr at the Enterprise Fund and Gerald Tsai at Fidelity were the flag bearers of growth and momentum investing. They purchased stocks based on popularity and price momentum, often ignoring balance sheets and income statements. These managers achieved outstanding returns and materially outperformed the market. Their self-promoting publicity boasted claims of being younger, more energetic, and better trained. Like attending a Cinderella Ball with no clocks on the wall, it worked great until it didn’t. The 1960s ended with a dramatic market crash. Carr left his mutual fund investors holding virtually worthless “letter stock,” while Tsai exited investment management entirely to join CNA, an insurance company. Carr later reemerged in the late 1980s, only to leave investors holding worthless junk bonds and filing for bankruptcy. Investors who followed the style of these go-go managers often experienced brief periods of excessive outperformance, only to end up in tears.
The go-go managers of the 1960s were eventually recognized for their luck rather than their skill. Running a fund with unbridled optimism and expensive publicists is not an investment strategy. It may be a profitable venture for fund owners, but not for the investors.
The 1960s were followed by the stagflation of the 1970s—a decade of sluggish growth, rising interest rates, and inflation. Commodities like gold and oil surged as inflation hedges. Value investors like Warren Buffett, John Templeton, and Charles Brandes, who applied the principles of Benjamin Graham, created wealth for their clients. While they faced challenges during the 1973-1974 market correction, their funds eventually recovered and rewarded patient investors.
Today, the market and the economy are showing signs of a similar shift. As Bob Dylan once sang, The Times They Are A-Changin’. The Xeroxes, Polaroids, and Sperry Rands of the 1960s have become today’s bitcoins, AI companies, and data storage firms. Fast-moving stocks with aggressive growth estimates and strategic press releases are once again leading investors down a momentum-driven path.
For most of the last 30 years, America has experienced a time of prosperity. Markets and the economy have been supported by falling interest rates, unprecedented productivity, disinflationary forces from global trade, and the U.S. dollar’s dominance as the world’s reserve currency. On four occasions—1998, 2001, 2008, and 2020—market corrections were met with the Federal Reserve and Congress increasing liquidity through lower interest rates, government spending, and asset purchases. This intervention allowed markets and the economy to recover but suppressed true price discovery.
This has led to the belief that markets will always do well. However, the current market sentiment echoes the hubris of the late 1960s. The era of falling interest rates that drove financial assets and growth stocks for the last three decades is likely ending. The U.S. dollar is in the early stages of losing its dominance as the world’s reserve currency. The Fed and Congress’s reliance on low interest rates, money printing, and deficit spending will only exacerbate inflation.
In 2022, we saw a glimpse of what could come. The U.S. 10-year Treasury note increased by over two percentage points and the Federal Funds rate rose by more than four percentage points. From June 2021 to June 2022, the Consumer Price Index (CPI) surged by over nine percent, leading to a market correction of over 18 percent.
As cheap money fades, we will see a seismic shift in market leadership. Growth stocks, whose valuations relied on low interest rates and inflated earnings expectations, will face significant headwinds. Hedge funds and private equity firms, which benefited from easy access to capital, will struggle to adapt. Wall Street’s predictions of transitory inflation will prove misguided as inflation becomes a persistent challenge due to debt, deficits, and geopolitical instability.
However, the performance of energy and commodities in 2022 provides insight into what may come. The energy index rose over 62 percent and the commodities index climbed more than 25 percent. These results highlight how value investing and commodity-focused strategies tend to excel during periods of rising inflation and interest rates.
Just as the countercultural music of Bob Dylan and the Beatles in the 1960s gave way to the introspective sounds of Carole King and James Taylor in the 1970s, today’s market environment will undergo a similar transformation. The era of go-go investing will yield to a more fundamental driven market. Capital will flow toward hard assets and companies valued using proven investment principles, rewarding those who recognize the shift. As Dylan reminded us, The Times They Are A-Changin’.
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