Posthaste: Lessons from the ‘Nifty Fifty’ that can help investors survive today’s chaos

‘Overvalued market, sticky inflation and an aggressive Fed’ — sound familiar? The challenges investors face today also typify the era of the Nifty Fifty, argues Bank of America strategists. Photo by Getty Images Good Morning! Advertisement 2 This advertisement has not loaded yet, but your article continues below. Financial Post Top Stories Sign up to…
Posthaste: Lessons from the ‘Nifty Fifty’ that can help investors survive today’s chaos

‘Overvalued market, sticky inflation and an aggressive Fed’ — sound familiar?

The challenges investors face today also typify the era of the Nifty Fifty, argues Bank of America strategists. Photo by Getty Images

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Remember the Nifty Fifty?

Maybe not, but this might sound familiar: “Fiscal decadence, surprise war, energy shortage, extreme inflation.”

These are the challenges we face today, but they also typify the era of the late 1960s and early ’70s from which rose what became known as the Nifty Fifty, according to a new report by Bank of America Corp.

This was a group of 50 large-caps on the New York Stock Exchange seen as buy-and-hold growth stocks. They were credited with driving the bull markets of the early 1970s, but their crash through to the early 1980s became an example of what happens when investors ignore fundamental stock valuation metrics.

They include household names that have survived today such as General Electric Co., Coca-Cola Co. and International Business Machines Corp., but also companies that would go on to struggle or disappear like Xerox Holdings Corp. and Polaroid Corp.

Jared Woodard, head of BofA’s Research Investment Committee, sees parallels between that era and today as a “valuable historical precedent for investors facing an overvalued market, sticky inflation and an aggressive Fed.”

Then as now, expensive, “quality” growth stocks were all the rage. After they peaked, market leaders changed from large caps to small, from growth to value and long-time stalwarts such as energy, real estate, banks and industrials came back in favour.

Here are Woodard’s five lessons from the Nifty Fifty that would serve investors today.

1) ‘Don’t fight the Fed and don’t buy the old leaders’

The Fed hiked rates to 13 per cent from 5.5 per cent during 1973/74, an aggressive bout of tightening that wiped out the “eye-popping” gains of the Nifty Fifty. These stocks fell to just 23 per cent of the overall market from 40 per cent in eight years.

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The lessons today’s investors can take from this is to avoid growth stocks until valuations reset and inflation peaks, Woodard said. Don’t spurn the winners of the past decade, such as tech, discretionary and communications, indefinitely, he said, but look for better value, higher probability and more immediate earnings.

2) ‘Some “deep value” stocks are just value traps’

Former high-flying stocks can look attractive after a bear market as they get cheaper and investors hope for a rebound. But companies that held impossibly high valuations tend to be judged harshly as financial conditions tighten, Woodard said. Tech and health-care stocks suffered the most during the Nifty Fifty fall.

For example, Xerox and Johnson & Johnson had nominal returns of zero per cent for five years after, while other companies such as Sears, Roebuck and Co. and Eastman Kodak Co. went bankrupt or rebranded.

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“The tech sector today is enduring its worst drawdown since the dot-com bubble and some stocks may not recover,” he said.

He advises investors to avoid broken business models and beware of assets that could be potentially stranded in China or at risk of regulatory intervention.

3) ‘Active asset allocation is essential’

Trading in the 1960s and ’70s was extremely volatile with the Dow Jones industrial average swinging between 800 and 1000.

“Today’s 60/40 turmoil looks a lot like historical episodes where markets overextend and ultimately correct with a vengeance,” Woodard said.

Market timing isn’t a good strategy in this environment, but buy-and-hold can struggle too.

Active investing and risk management are crucial as “there are no ‘safe’ strategies when stocks and bonds are correlated,” he said.

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4) ‘What do you call a growth stock that has matured? A value stock’

Growth stocks can mature. Woodard offers the example of IBM, which went from a growth stock in the 1970s to paying a 4.8-per-cent dividend today. The company diversified beyond computer hardware to consulting and software and got rid of its underperforming units to focus on revenue growth and free cash flow.

There are a few examples of companies that managed to age gracefully out of the Nifty Fifty.

The S&P 500 value index is >10-per-cent tech companies with familiar names like Visa, Broadcom, Intel, and IBM,” he said.

Today, Woodard recommends going for companies that have built “fortress-like balance sheets and offer strong visibility into solid business models.”

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5. ‘There are big winners even in bear markets’

And one way to find them is to dig through the rubble of a correction, Woodard said.

“Selectivity is key, and the right picks can serve investors well,” he said, giving the example that one in four initial public offerings in 1999 are blue chip stocks today.

In the aftermath of the Nifty Fifty crash, names such as Coca Cola, PepsiCo Inc., Rite Aid Corp., Stanley Black & Decker Inc., and Dow Inc. went on to become “lasting behemoths.”

Of the 40 of the Nifty Fifty that remain today, the top 10 have averaged 10-per-cent annualized returns since their market bottom.

“A replay of the Nifty Fifty era could give value an edge over growth for the next five years or more,” Woodard said.

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He recommends small caps, value and energy.

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Inflation has shot as high as the double digits in some parts of the world this year and central banks are still struggling to get it back to the 2 per cent target.

U.S. inflation figures out last Thursday came in cooler than expected, but prices still rose 7.7 per cent from a year earlier.

But do you know where inflation is under control? — China. While the rest of the world groans under the highest inflation rates in 40 years, China’s CPI reading in October was 2.1 per cent, year over year.

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The reason? Slower growth caused by COVID lockdowns is keeping inflation in check, said BMO senior economist Jennifer Lee, who brings us the chart above. October’s rate was the slowest since May when real GDP actually shrank during the Shanghai COVID-19 shutdown.

This is allowing government and the central bank to expand monetary and fiscal policy rather than tighten it.

“This stands in stark contrast to much of the rest of the world, where taming inflation is the top priority,” wrote Lee in a note.

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  • Ontario Fall Economic Statement
  • Tiff Macklem, governor of the Bank of Canada, will give the opening remarks at the fourth annual Diversity and Inclusion in Economics, Finance and Central Banking Conference.
  • Arif Virani, parliamentary secretary to the minister of international trade, export promotion, small business and economic development, will deliver remarks to mark the start of Global Entrepreneurship Week 2022 in Canada
  • The 10th annual Pathways to Prosperity National Conference in Ottawa
  • Transport Minister Omar Alghabra will hold a news conference to make an announcement about the Canada-India Air Transport Agreement.
  • “Advancing Indigenous women entrepreneurs in Alberta” will bring close to 200 Indigenous and non-Indigenous entrepreneurs, artists, innovators, and sector leaders together in Calgary to celebrate Indigenous women entrepreneurs, examine the opportunities and barriers they face and share conversations on reconciliation, decolonization and the importance of a building an inclusive innovation ecosystem
  • Marie-Claude Bibeau, minister of agriculture and agri-food, will make an announcement at Ferme des Sommets to highlight support to supply-managed sectors as presented in the 2022 fall economic statement.
  • Jonathan Wilkinson, Minister of Natural Resources, will provide a clean fuels update in Vancouver and make an announcement to support refuelling stations in Canada
  • Aurora Cannabis holds its annual general and special meeting of shareholders virtually in Edmonton
  • Today’s Data: Canada construction investment, new motor vehicle sales, Bank of Canada Senior Loan Officer Survey
  • Earnings: Tyson Foods, Turquoise Hill Resources, Ivanhoe Mines, K92 Mines, H&R REIT

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Deciding to start a family is an exciting and life-changing milestone, but it’s also an expensive decision, writes Maria Miletic for the Financial Post.

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Raising a child from birth to 18 years old will cost today’s parents roughly $283,000. Coupled with the increasing cost of living and home prices still near record highs, it’s easy to see why it’s important to begin planning for your family’s long-term financial health and security as soon as possible.

Miletic outlines five core themes — savings, security, solidify, strategize and subtract — that will help organize your thoughts to devise a financial plan, regardless of where you are in your family building journey.

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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