Why You Should Invest Like It's 1976

A year into the stock-market recovery, there's a lot of uncertainty about how long the boom will last. We may be able to learn something from the market's performance during the mid-1970s, as the similarities so far are striking. After peaking in January 1973, the Dow Jones industrial average fell 50 percent, to 570, by late 1974. Over the next 15 months, however, the market gained back nearly 75 percent of its value. The Dow's latest crash, from its October 2007 high of 14,000 to a low of 6,500 in March 2009, marked a similar loss over a similar period of time. The recovery is also strangely similar: in the 13 months since March 2009, the Dow has risen about 70 percent. If the 1970s model holds, the Dow could hit 11,500 sometime early this summer. Then comes decision time.

By 1976, deficit spending and inflation (remember the energy crisis?) created headwinds that pushed the Dow down 30 percent over the next two years, where it hovered until the bull market took off in 1982. Some experts say similar headwinds are blowing today and worry that the recovery has created an equity bubble primed to pop. "It feels like things will top sometime this summer," says Scott Redler, chief strategic officer of online trading platform T3Live.com. What should history fans do with their investments now? In the late '70s investors piled into commodities such as gold, oil, and agricultural products. The same will probably happen this time, but Redler thinks the even safer bet is cash. Interest rates are likely to rise at some point, meaning higher yields on cash accounts.