“Figures often beguile me, particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice and force: ‘There are three kinds of lies: lies, damned lies, and statistics.'”
–Mark Twain, Chapters From My Autobiography
It is the latter part of this quote that gets the most attention, but the lesser quoted preamble merits some discussion as well: “Figures often beguile me.”
Yes. Yes, they do — and today I am beguiled most particularly by the present level of a figure that was an icon of the 1970s and early 1980s: the “Misery Index.” Some of you may remember it — it is a simple statistic, created to be an extremely shorthanded evaluation of the unhappiness caused by the economy. It is simply the unemployment rate added to the inflation rate.
The Misery Index grew famous during the candidacy of Jimmy Carter (a man not known for projecting or encouraging misery), and he used it with great effect against his rival in the 1976 presidential campaign. The index was then in the low teens, having come down from the peak of 19.9% it had reached shortly after Gerald Ford took office. Nevertheless, a figure in the low teens still seemed too much to the electorate, and Carter won easily. However, Carter’s own Misery Index peaked at 21.98% in June 1980, when the next election was in full swing. Carter was hoisted by his own petard and lost in a landslide.
Those numbers are worth keeping in mind as we contemplate a current economy frequently referred to in less than glowing terms, and in light of a market that has recently turned hostile on the bulls. Currently, the Misery Index stands at a scant 5.3%, with the latest unemployment figures coming in at 5.1% and inflation at a mere 0.2% for September. That’s the lowest the index has been since the spring of 1956 — the exact point in time when the end of the first season of Happy Days is set.Happy Days first aired in 1974, when the Misery Index was just gaining notoriety.
Now, I wouldn’t argue that the happiness of the days enjoyed by Richie, Fonzie, Potsie, and Mrs. C was primarily defined by a combination of the era’s low unemployment and inflation rates. (I do not recall any episodes where the gang discussed macroeconomic factors over shakes and fries at Arnold’s.) That would fall under the “damned lie” category of statistics, but, you know, the mid-’50s are remembered as being pretty good economic times. Will sitcom creators of the 2030s (assuming there is still such a thing as a sitcom then) look back on today’s era as being especially mirthful? Even for carefree high-schoolers? I know they’d have a hard time selling that idea to the speechwriters of today’s presidential hopefuls.
Ironically, the problem with today’s Misery Index reading is that in the estimation of some important policymakers, it’s too low. Inflation, at a fraction of 1%, is not high enough. Anything substantially short of the Federal Reserve’s target rate of 2% inflation (i.e., “healthy inflation”) is putting a brake on raising interest rates and is the current bugaboo of our economy, believe it or not. This makes enough sense: A healthy rate of inflation of around 2% indicates that the economy is properly employing the labor force and capital available. (Check your Econ 101 books for chapter and verse.) The forceful deflation present during the Depression, the mild deflation of the Great Recession, Japan’s stagnation over the past 20 years — there’s plenty of historical and recent evidence on hand to demonstrate that we want more inflation than we’ve got. But the economy does have a little inflation — just not enough — so it would be easy to chalk this up as a first-world problem. Look nearly anywhere else in the world for more significant economic problems.
So…are happy days ahead? And even if they are from an economic perspective, should that translate into happier days for investors than those we saw in August and September? Here we enter the territory of “you can use statistics to prove anything you want.”
In fact, 1956 itself was a fairly tepid year for investors, with the S&P 500 returning 6.4% nominally and 3.3% after adjusting for inflation. And 1957 was a downright poor year for stocks, with investors suffering average losses of 9.3% nominally and 11.3% adjusted for inflation. So, working off that one data point — the immediate future measured by stock market returns over a limited period — the last time our economy was this low on “misery,” investors fared poorly over the short term. Low inflation plus low unemployment is not a recipe for guaranteed short-term stock-market joy.
Those muted returns owed partly to the fact that the market was digesting the great returns of 1949-1955, a seven-year period boasting average annualized returns of 24%, benefiting from stocks’ historically low price-to-earnings ratio of 5.8. After the two-year pause of 1956-57, the eight years that followed were delightful for investors, showing 13% compound annual growth over the 1958-65 period. So, over the long term, 1956 was squarely in the middle of two decades of very happy days for investors, though it may not have seemed that way at the time.
Today’s domestic market is faced with the process of digesting the 17.3% annualized returns of 2009-2014 — a period of moderate economic expansion during which the market was rebounding from a far less depressed starting point for stocks, leaving the market at a somewhat elevated valuation by historical standards. Of course, no one can know where the market will go. And in drawing any parallel with the last time the Misery Index was at this level, I’m not predicting a repeat of history. The market’s returns cannot be projected by anchoring on one data point from the past and projecting it forward.
Looking at today’s Misery Index is a reminder that the economy isn’t decidedly in trouble, and looking back on the last time it looked (kind of) like it does today, we can see that although the market didn’t continue straight upward, it wasn’t a bad time to stay invested. I wouldn’t consider any stock from 1956 a useful guide to stock market conditions going forward, as today’s prices are too elevated compared to the levels back then to offer any margin of safety. However, bear markets do not start merely as a product of higher valuations; a trigger such as a war or a declining economy is almost always necessary. The rough patch for stocks in August and September is, so far, merely a reminder that stocks can always take a break from a great run, even in decent economic times. But more severe declines don’t have a history of starting in times that look a lot like today.
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