How does the euphoria for stocks in the days after the 1980 election contrast with today’s Trump election euphoria? What were the fundamentals of the 1980 stock market compared to today’s fundamentals? What interest rates were paid to borrowers of money? We will make the case for very useful contrarianism in the aftermath of the current stock market euphoria.Occasionally, I feel like Forrest Gump, and we are in one of those times. In 1980, my dad (Captain Harold Smead) was Ronald Reagan’s biggest fan. My stock brokerage license went live one week before the 1980 presidential election. Dad called me and asked to buy something that I thought would go up if Reagan got elected. We bought 200 shares of Loral Corporation, a defense electronics company. It soared in value the day after the election and my dad sold it at a tidy profit (this was before we learned to hold winning stocks to a fault).In the fall of 1980, the stock market was trading around 7.5 times earnings, and U.S. citizens, in aggregate, had 9% of their household assets in common stocks (Fed Z-1 report). In the months after the election, a euphoric high was followed by a 22%/21-month bear market decline. At the bottom in August of 1982, stocks traded for six times profits and paid a 5% dividend. Since the interest rates were in the 14% area on Treasury bonds — nobody wanted the stocks.However, over the last 42 years, long-term stock market participants became extremely wealthy from consistent participation in the stocks that Reagan’s election triggered great enthusiasm for. Warren Buffett likes to say that when markets have been good for a long time, people line up for the bell to start the trading, expecting to get fed like Pavlov’s dog!Fast-forward to today’s post-election enthusiasm. In the aftermath of Trump’s victory, S&P 500 Index stocks are trading around 25 times profits and offering a 1.25% dividend yield. In many ways, we have one of the most expensive and euphoric stock markets of the last 100 years. Equity ownership is 41% in the Fed Z-1 report as of the latest update.As a sign that the speculative activity of 2021 has been reborn, Bitcoin and other speculative investments are going wild as well. Bank stocks have gone from the outhouse to the penthouse in one year. Oil and gas stocks are already feeling the heat from the impression that President Trump will jawbone (“drill baby drill”) for more drilling, which, hypothetically, would lead to lower oil and gas prices.In many ways, this is the antithesis of 1980. Back then, Fed Chairman Paul Volker kept interest rates very high to kill inflation. I sold someone an 18% Treasury Bill in 1981. Reagan helped turn the inflation psychology by telling the Air Traffic Controllers Union that if they struck, he would fire and replace them. The energy sector of the S&P 500 Index peaked at 29.74% — it is close to 3% currently.Today, we have a Federal Reserve Board that just cut short-term interest rates by 75 basis points and triggered a rise in the 10-year Treasury bond rate of 60 basis points. Two powerful labor unions, the Dock Workers and the Boeing Machinists, just inked 8.5% per year multi-year wage increases. Does that sound like a setup for 2% inflation?Our goal in the aftermath of this era is to defend our capital and make money over 5-10 years while many around us are getting separated from theirs. We want to buy meritorious companies that have some inflationary defense characteristics and are deeply out of favor due to the expectations built into the post-election burst of enthusiasm. We like Charlie Munger’s idea around ignorance avoidance and always believe it is important to fear stock market failure.More By This Author:Inflation Mathematics
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