They say that misery loves company. The misery index was initiated by economist Arthur Okun, an adviser to President Lyndon Johnson in the 1960's. It is simply the unemployment rate added to the inflation rate. It is assumed that both a higher rate of unemployment and a worsening of inflation both create economic and social costs for a country. A combination of rising inflation and more people out of work implies a deterioration in economic performance and a rise in the misery index. (source: www.miseryindex.us)
When things are going well like they were in the mid 2000's, we saw our discretionary income rising and it made it feel like we could afford anything that our hearts desired including real estate, cars, and fancy vacations. When we are in the midst of economic times like those of the mid 200's, it can really feel like nothing can wrong. Then we saw the downturn of the market in the late 2000's, stock portfolios got cut in half, and the bubble burst on our real estate.
If you can remember the end of the Carter years in 1980, the Misery Index hit an all time high of 21.98 in June of 1980. (www.miseryindex.us) We had double damage in June of 1980 with both inflation and the unemployment rate being extremely high. While inflation has continued to remain relatively low as of recent years, the Misery Index has now hit a 20 year high with the many unemployed we have in America. Should inflation rear its ugly head again, we could see the Misery Index hit unprecedented levels in the United States. So, why should you care about this at all?
Remember, that the Federal Reserve is measured by an interesting criteria. Unlike other central banks, it has a double mandate of creating low inflation coupled with low unemployment. The Fed is supposed be independent from the political process, but clearly in today's day and age Wall Street and Main Street are watching their every moves. We may be able to judge part of what the Fed will do with interest rates on how they are doing with their task of keep both employment high and inflation low. This could help you with some insight on what to do with your interest sensitive type investments.
The decade of the 1970's was the highest decade on record for the Misery Index. (www.miseryindex.com). For those that can remember, it was also one of the most sideways decades for the stock market over the last century. This doesn't mean that the next decade will follow that is the Misery Index happens to get high again, but certainly something to think about when deploying your investment strategy as history does have a way of repeating itself.
I think if the Misery Index tops 20 again like it did in 1980, it may feel a little bit like Kathy Bates as the foot of our bed with a sledgehammer. Except the novel we may be writing is why our financial goals got pushed back a decade because misery loves company!
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder oXYGen Financial, Inc
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