I first received a license to sell registered securities in 1978. Jimmy Carter was president. The Dow Jones index was around 800 points. Since 1969 it had risen to 1,000 points a few times, but never managed to break that barrier. This problem was not caused by President Carter or his predecessors, Ford and Nixon.
The economy is bigger than the president, Congress, or any institution. Yet many economists believe that the rising inflation and stagnant economic growth they call stagflation began with Lyndon Johnson’s decision to fight two wars simultaneously, one in Vietnam and one against American poverty. The massive government spending required by both ventures had the unintended consequences of accelerating inflation, rising interest rates, and slowing economic growth.
The stock market paid the price as high interest rates competed with equity investments and business performance was lackluster. Why buy stocks when bonds were paying double-digit interest? The answer, of course, was that stocks were cheap. A $100,000 investment in the DJIA in 1978 would be worth $4,750,000 today.
Over time, the economy grows. Why? Because there are more consumers of business services and products. In 1978, the U.S. population was 222 million. Today, America is home to 342 million people. Good companies innovate. They develop new products and new technologies. They make money for their investors. The stock market is not an indefinite blob of financial complexity. It is simply a stock market. Stocks are certificates of ownership in companies. The boards and managers of these companies are challenged and motivated to work effectively for the owners, the shareholders. When they succeed, their companies succeed too, and stock prices usually rise.
The recent declines in stock markets are a familiar feeling for investors. Inflation and interest rates have risen. This ultimately affects the economy. Unemployment is rising. Corporate profits are negatively affected. Stock prices are falling.
Inflation is bad for businesses and consumers. But the ultimate cure for inflation is inflation. Higher prices reduce demand. Less demand leads to an imbalance between supply and demand for goods and services. Businesses reduce their production. Supply and demand find their balance. Prices stabilize.
What should you do when stock prices fall? Usually nothing. Sometimes you should add to your holdings if you have cash. I like to discuss these matters with my financial advisor first. In such situations, a competent advisor can help you make good decisions and avoid mistakes.
Over time, the economy will grow and the value of companies will increase. Investors’ wealth will grow. There will be ups and downs, but my advice is to stay invested for the long term, turn off the financial news, and watch an episode of Seinfeld.
Michael K. McMahan is a resident of Gaston County.
