Not all stock mar­ket news is bad

The Washington Times Weekly - - Editorials -

Some­thing ex­tra­or­di­nary hap­pened 25 years ago — Fri­day, Aug. 13, 1982. Near the bot­tom of the deep­est re­ces­sion since the Great De­pres­sion — as un­em­ploy­ment was steadily ris­ing to­ward 10.8 per­cent, mort­gage in­ter­est rates ap­proached 16 per­cent and 30-year Trea­sury bonds yielded more than 13 per­cent — the stock mar­ket be­gan to soar. Apart from a three-year bear mar­ket that re­sulted from the de­fla­tion of the dot­com/tele­com-gen­er­ated stock-mar­ket bub­ble, which peaked dur­ing the first quar­ter of 2000, the stock mar­ket has pro­duced ex­tra­or­di­nary gains over the past 25 years.

To fully ap­pre­ci­ate what has oc­curred since Au­gust 1982, it is nec­es­sary to re­view what hap­pened dur­ing the 15-year pe­riod pre­ced­ing the 1980 and 1981-82 re­ces­sions. Af­ter grow­ing by an av­er­age of 10 per­cent per year from 1954 to 1965, the ma­jor stock-mar­ket in­dexes were ut­terly stag­nant from 1965 to 1979. The an­nual av­er­age for the Dow Jones In­dus­trial Av­er­age from 1965 through 1979 was 870, rang­ing from a high of 975 in 1976 to a low of 753 in 1970.

The an­nual Dow av­er­age be­gan the pe­riod at 911 (1965) and ended at 844 (1979). The an­nual av­er­age over the same 1965-1979 pe­riod for the S&P stock in­dex, which com­prises the na­tion’s 500 largest com­pa­nies, was 95, rang­ing from a high of 109 in 1972 to a low of 83 in 1974. The S&P in­dex grew by a mi­nus­cule 1 per­cent per year from 1965 through 1979. (The Nas­daq in­dex was not es­tab­lished un­til 1971.)

The day be­fore the bull mar­ket erupted on Aug. 13, 1982, the Dow closed at 777, the S&P at 102 and the Nas­daq at 160. Even af­ter the re­cent hefty re­treats from the nom­i­nal record lev­els re­cently achieved by the Dow and the S&P, the stock mar­ket re­flects ex­tra­or­di­nary longterm gains. The Dow closed at 13,271 on Aug. 9; the S&P 500 closed at 1,453; and the Nas­daq closed at 2,556. The av­er­age an­nual growth rates over the past 25 years have been greater than 12 per­cent for the Dow, nearly 12 per­cent for the Nas­daq and greater than 11 per­cent for the S&P 500. To place th­ese ad­vances in con­text, dur­ing the last 25 years, an­nual con­sumer price in­fla­tion has av­er­aged 3.1 per­cent; real eco­nomic growth has av­er­aged 3.25 per­cent per year; and real me­dian house­hold in­come has in­creased an av­er­age of 0.7 per­cent per year.

It is worth re­call­ing the Dec. 5, 1996, “ir­ra­tional ex­u­ber­ance” warn­ing is­sued by then-Fed Chair­man Alan Greenspan. On that day, the stock in­dexes closed at 6,437 (Dow), 744 (S&P 500) and 1,300 (Nas­daq). Even af­ter the re­cent mar­ket tur­moil, which has shaved more than 700 points off the Dow, for ex­am­ple, the stock in­dexes are still about 100 per­cent higher than their “ir­ra­tional ex­u­ber­ance” lev­els.

Yes, a ma­jor three-year bear mar­ket re­duced the Dow from its cycli­cal peak of 11,723 in Jan­uary 2000 to 7,286 in Oc­to­ber 2002 (when, by the way, it was still nearly 850 per­cent higher than its Au­gust 1982 level). The bear mar­ket also re­duced the S&P and Nas­daq from their cycli­cal peaks of 1,527 and 5,048, re­spec­tively, to about 800 (S&P) and 1,300 (Nas­daq) dur­ing the first quar­ter of 2003. But those ma­jor de­scents oc­curred from stock-mar­ket lev­els that re­flected un­prece­dented price-earn­ings ra­tios, which ex­ceeded 36 for the S&P 500 in 1999 and ap­proached 100 for the profit-light Nas­daq. To­day, more than three years into the bull mar­ket that re­sumed dur­ing the first half of 2003, priceearn­ings ra­tios are far more rea­son­able (be­tween 14 and 15, their his­toric norm) as earn­ings have soared in re­cent years.

Com­pared to the nearly two decades that pre­ceded the last 25 years, the stock-mar­ket per­for­mance dur­ing the past quar­ter cen­tury has been truly breath­tak­ing.

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