Another 'Watergate market' ahead? Politics aside, a lot has changed

I don't mean to pile on, but it's getting hard to ignore this whole "Watergate déjà vu" discussion.

After President Donald Trump fired FBI Director James Comey, a flurry of stories in the financial media looked back at the brutal global bear market of 1973-74 that coincided with the unraveling of the Nixon presidency more than four decades ago, asking the provocative question: "Could it happen again?"

The Dow peaked in December 1972, shortly after Nixon was re-elected to a second term. By the time he resigned in August of 1974, the Dow had fallen almost by half. It would take another eight years for the index to get back to its pre-crash level in nominal dollar terms and 20 years to recover in real, inflation-adjusted terms.

Given the severity, it's no surprise that the "Watergate bear market" instills fear. While our current political drama still has lots of plot twists to play out before the final act, headlines, investigations and indictments since the Comey firing have only increased comparisons to that earlier Shakespearean tragedy. So as my New Year's gift to readers, here are a few things to keep in mind when professional market watchers or your know-it-all brother-in-law make comparisons with that earlier era.

First, the global market swoon of 1974 was precipitated by huge and rapid changes in the global economy. The collapse in 1971 of the Bretton Woods system, a decades-old international monetary agreement that fixed currency exchange rates tied to gold, triggered devaluation of the dollar against other currencies. But the price of oil imported into the U.S. was slow to adjust. The stage was set.

During the 1973 Yom Kippur War, Arab member states of OPEC imposed an oil embargo on Israeli allies. The subsequent quadrupling of oil prices ushered in a 16-month period of stagflation, with inflation topping 11 percent, GDP falling 3.2 percent, unemployment reaching 9 percent and interest rates headed toward 25 percent — hardly the macro environment we see today.

Steve Jobs and Bill Gates were in their late teens during Watergate. Seven of the top 10 names in the Fortune 500 back then were oil and auto companies, with General Motors on top. Today, tech, health care and conglomerates share the top 10 slots with retail giant Walmart at No. 1 and GM at No. 8.

Today's global, high speed, interconnected trading environment looks nothing like the much smaller, less integrated stock market of four decades ago. In the early 1970s, investors bought and sold one stock at a time. Discount brokers didn't exist and high fixed commissions on stock trades created "market friction." Fewer than 15 million shares traded hands on an average day at the New York Stock Exchange and the average holding period was almost five years. Organized options and stock futures only began trading officially in 1973.

All of that meant it took the market longer to adjust to new information and adjustments happened in large steps, rather than incrementally.

It was also a much smaller market, affecting fewer individuals directly. When President Richard Nixon instigated the infamous "Saturday night massacre" in October 1973, causing the Special Prosecutor Archibald Cox to be fired, John Bogle was still more than two years away from launching his first retail index fund.

Investors held about $45 billion in assets among fewer than 500 mutual funds. ERISA (the Employment Retirement Security Act), which essentially created the 401(k) market in the U.S. and supercharged the growth of mutual funds, was not signed into law until after Nixon's resignation in 1974.

By way of contrast, the average daily volume on the New York Stock Exchange has increased 100-fold, with 1.5 billion shares trading hands, and being held on average only a few months with computerized trading programs buying and selling the same stock in fractions of a second.

Last year, more than 8,000 mutual funds (almost four times the number of stocks on the New York Stock Exchange) held more than $16 trillion in assets. Institutions and individuals easily and inexpensively trade whole baskets of stocks in another $4.5 trillion in ETFs (Exchange Traded Funds) to hedge risk and make market or sector bets.

There are some parallels to that earlier era worth noting. We see the weakening of decades-old international arrangements, the British exit from the European Union being the most obvious though not the only example. We have political uncertainty at home and abroad and military conflicts hot and cold that threaten to erupt and disrupt. But the markets continue to shrug off these risks and set new highs.

While I'm not smart enough to know what will happen in either in our politics or financial markets, if some commentator starts talking about Watergate and the stock market, drawing parallels to our current situation, you may hear me muttering under my breath, "It's the economy, stupid."

Brad Allen is a freelance journalist and former investor relations executive for firms including Imation Corp. and Cray Research. His e-mail is brad@bdallen.com