Since the pandemic, however, we've seen an uptick in volatility across many economic and inflation readings, as well as more uncertainty and trade risk on the geopolitical front. We've also seen an increase in labor's power, with wages accounting for a rising share of GDP.
All told, the current environment bears a striking resemblance to the period from the mid-1960s through the early 1990s, which I've dubbed the Temperamental Era. If the comparison holds and we are indeed in a prolonged cycle of macroeconomic choppiness, it could have significant implications for investors.
If we're to understand the possible sequel, it's important to scrutinize two key characteristics that defined the Temperamental Era:
The Temperamental Era exhibited more robust growth during periods of economic expansion, but with higher highs and lower lows in GDP growth—and more frequent recessions. Since the pandemic erupted, we've seen similar economic behavior, with the year-over-year change in real GDP swinging from –7.5% in mid-2020 to nearly 12% in mid-2021 to around 5% in 2022.
Big swings
Compared with the subsequent 30 years, the Temperamental Era experienced larger and more frequent swings in real GDP.
Source: Charles Schwab and Bloomberg.
Data from Q1 1965 through Q2 2024.
Another defining characteristic of the Temperamental Era was heightened inflation volatility. The period was punctuated by two extreme peaks during the mid- to late-1970s, exacerbated by the Federal Reserve declaring victory on inflation too early. In both cases, the Fed eased policy only to see inflation creep up again. The aggressive rate hikes that followed hit the economy hard, generating back-to-back recessions in the early 1980s.
Today, the Fed is easing its interest rate policy as inflation pressures recede and the labor market weakens. We continue to believe that the latest trend of disinflation will hold, but there could be more inflation volatility going forward—for two principal reasons:
