Volatility seems to be the word for today. Market volatility. Domestic political volatility. Geopolitical economic and military volatility. The effects of such volatility cannot be forecasted, but they can be mitigated if our attention is directed toward understanding and preparing for those things that are within our control.

The Economy

In a world of disruption, the economic data has been relatively stable. The consumer price index showed an annual increase of 2.4% in February, which was nearing the Federal Reserve’s target of 2%. Unemployment registered 4.4%, which has been the average of the last four monthly readings. Consumer confidence continued to remain near its low point over the last five years. Leading indicators continued their steady decline. GDP grew at a subpar .7% annual rate in the last quarter of 2025, but there have been no other signs of an impending recession. Looking forward though, these measures could all change markedly in the near future, due to economic destabilization from the Middle East.

Until recently, mortgage interest rates were falling along with the inflation numbers. That has changed. Freddie Mac reports an increase in the 30-year rate from just under 6% in February to 6.38% now. The increase will affect housing affordability, which had improved by 14% over the last year as rates became lower, incomes became higher, and more houses were listed for sale.

The Markets

Led by technology, the stock market has been rolling over since last October. The high point for the S&P 500 was reached on January 28th. That index has fallen 6% since then, while the ETF that replicates the former leaders, the Magnificent Seven, is down more than twice as much from its peak. Other asset classes like bonds and commodities have fared somewhat better but have also been hit by new volatility. The return of intermediate-term Treasury bonds was about zero during these last 5 months, but they rose and fell 3.5% along the way. Gold, the star performer of last year, is still up 20% over the same period, after falling 22% from its peak at the end of January. Short term bonds have largely avoided the problems of the other asset classes, but even some of those have hiccupped a little recently.

The recent stock pullback has hardly made a dent in the market’s overvaluation. At the end of February, the so-called Buffet indicator was at its second highest point since 1950, surpassed only by January’s reading. The Shiller CAPE ratio tells the same story. Since 1880, higher readings were only seen in January of this year and several times in 2000. The valuation measures are still heavily influenced by the concentration of high-priced technology stocks in the S&P 500 index, so an average stock is more fairly priced and may be less vulnerable to a continued decline. Their PE ratio of the S&P 493 is a little over ½ that of the Magnificent Seven stocks.

The stock market’s extended valuation, in addition to speculative enthusiasm, has also increased the measure of equity holdings as a percentage of financial assets of households and nonprofit organizations assets to 47% as of December. Another record high. Households hold about 34% of their financial assets in retirement accounts, suggesting that equity positions represent about 22% of household retirement savings. This is greater than their 18.5% net exposure to real estate. Most of this retirement equity investment is positioned primarily in mutual funds that are designed to track the overvalued indexes, implying potentially unexpected risk in the retirement universe.

Volatility and the 1970s

Webster defines volatility as “a tendency to change quickly and unpredictably”. Since the stock market often moves with occasional quick and unpredictable downdrafts or “corrections”, investors often equate volatility with falling prices. It often is that, but volatile periods can also be periods composed of large increases and decreases but little positive progress. Some call this a “trader’s” or a “stock picker’s” market rather than a “buy-and hold” market. Volatile markets are harder to manage both emotionally and administratively than those that exhibit a strong trend. The 1930’s and the 1970’s are among the better examples of long-lasting volatile markets.

From the end of 1968 to October 1982, the Dow Jones Industrial Average price gained zero. In that interval there were four bull and bear markets, the largest lost 47% and then regained the reciprocal 82%. (It takes that much gain to recover that much loss.) The effect was actually worse, because inflation increased by 177% during those 14 years, so the real value of an investment in the Dow fell 64%, or over 7% per year.

For most investors, who did not experience this period personally, it is worth being aware of it for two reasons. While there is no way to predict whether this type of environment will re-occur any time soon, it should be recognized that since it has happened once, it is not outside the realm of possibility that something similar could recur. Secondly, the effect of this type of occurrence can profoundly change expectations for retirement planning for index fund investors.

The decade beginning in the late 1960s was characterized by overvalued glamour stocks known as the “Nifty Fifty” or “One Decision Growth Stocks” (buy and hold), which was an investment meme then like today’s Magnificent Seven”. The overvaluation was due to an abundance of money in the economy produced by excess government spending due to Lyndon Johnson’s “guns and butter” economics, funding both the Great Society programs and the Vietnam War simultaneously. The excess money led to upward pressure on the price of gold and Richard Nixon’s cancellation of the dollar’s convertibility to gold at $35/oz. It also led to the beginning of persistent inflation. Today’s overvaluation has been caused by the Federal Reserve’s provision of excess liquidity through Quantitative Easing, “helicopter money” handouts, and infrastructure bills which created the conditions for the recent pandemic period inflation.

In addition to the effects of excess government spending, inflationary conditions in the early 1970’s were aggravated by the Arab Oil Embargo during the Yom Kippur war with Israel. That experience created an economic oil shock producing long lines at the gas stations and increased the price of gasoline by 47%. The Middle East conflict could cause a similar situation today, not only on a national basis but on a global one.

The inflation increases of the late 1960s prompted the Fed to raise interest rates. This tactic resulted in recession (and the 1969-70 bear market). Rates were lowered too early in order to re-stimulate the economy. The economy returned (1970-73 bull market), but inflation started from a higher level and became higher than before. Interest rates were raised again, and recession occurred once more (1973-74 bear market). This cycle repeated, eventually including another oil shock during the Iranian revolution, until the Fed chair Paul Volcker raised rates into the double digits, causing a final double-dip recession (1980-82 bear market). Through this process, real (inflation-adjusted) stock prices lost their overvaluation. The speculative fervor of the 1960s became a faint memory, and the stage was set for the bull market of the next twenty years.

There is clearly a parallel between the beginning of the 1970s, and today. There is also another economic tidbit that could be applicable here. In 1920 Nikolai Kondratiev identified a “long-wave” economic cycle that repeated every 50- 60 years dating back to 1780. Perhaps not coincidentally, the 1971 market was 55 years ago. Perceived correlations can change, however, so a replay should not necessarily be expected. It is important to be aware of the possibilities, however, and develop a plan that will work, rather than expecting recent experience from the past decade to continue uninterrupted. As Mark Twain said, “History does not repeat, but it often rhymes”.