... But Is '70s-Style Inflation the Real Enemy?
NEW YORK -- Are investors fighting the last war?</br></br>In the past week's tumult, investors have favored the same sectors of the stock market that did well during the 1970s oil-price shocks and pummeled most of the same losers, according to Barra, a Berkeley, Calif., investment research firm.</br></br>But a minority of investment strategists say that the market may have learned too well from the inflationary jolts of 1973-74 and 1979-80. In particular, they suggest that investors may be acting on expectations about inflation and interest rates that aren't justified by the current limping economy.</br></br>The most obvious differences that set today apart, says Richard Hoey, U.S. chief economist at Barclays de Zoete Wedd, is that "those two oil shocks came when the economy was closer to boom levels" and inflation was already a problem. The result in 1973-74 was "an inflation psychology that fed on itself," as businesses stocked up inventories and consumers spent like there was no tomorrow. In 1979-80, the Federal Reserve fought back with a sudden and very aggressive monetary tightening that sent interest rates into the stratosphere.</br></br>Since the Iraqi invasion of Kuwait, investors seem to be betting that soaring inflation and interest rates are going to be big problems again.