Recession Recoveries: 1981-82
Monday 06/07/2010 - 4:38:16 pm
What happened, how the markets came back,
and the rewards for the patient investor.
presented by Jacob Warren
The numbers. This 15-month recession represented the biggest struggle for the Reagan administration during its first term. People often remember this deep recession in terms of unemployment: in 4Q 1981, 10.5% of Americans were out of work; 28% of teenagers and 20% of African-Americans were without jobs.1 That was the highest unemployment rate since the Great Depression; to top it off, 17,000 businesses failed during the downturn.2 A bear market was firmly in place: the Dow Jones Industrial Average hadn’t topped the 1,000 mark in five years.3 GDP fluctuated from quarter to quarter – between 2Q 1981 and 3Q 1982, it ranged from 4.9% to -6.4%.4
The reasons. While a brief recession did occur in 1980, historians commonly attribute the 1981-82 recession to the “tight money” policy adopted by the Federal Reserve. During the late 1970s, the U.S. was experiencing double-digit inflation. Fed chairman Paul Volcker spearheaded a policy decision to slow the growth rate of the money supply to combat inflationary pressures. The Fed set interest rates higher and higher –by December 1980, the prime rate had hit its all-time high, 21.5%. Volcker’s radical stance was painful for the banking sector, the real estate sector, and the overall economy.5 But there would be a spectacular upside.
The rebound. In March 1980, inflation approached 14.8%. By July 1983, it was under 2.5%, and it would stay in single digits for the next quarter-century.6 The Dow would gain 1,500% over the next 17½ years, rising from an August 1982 low of 777 to 11,722.98 in January 2000.7 The S&P 500, which had last topped 100 in 1968, would hit 200 for the first time by Thanksgiving of 1985.8 The NASDAQ Composite Index, which had reached the 200 mark in 1980, would reach 300 for the first time in May 1983 and 400 in May 1986.9 By the mid-1980s, unemployment levels had notably dropped and GDP was back in the positive column.
The lesson. After almost a decade of gloomy economic headlines and a staunch bear market, Americans were quite pessimistic about stock market investment and the future of the economy at this point. But the markets do recover, often more quickly than we imagine – and as this example shows, historically the persistent investor has been rewarded for his or her optimism. Today, it helps to take a satisfying look back and see how the markets have rebounded and prospered since economic downturns and detours like these.
Jacob Warren
Warren Wealth Management
111 West Port Plaza Drive, Ste 300, Saint Louis, MO 63146
(866) 463- 0752 ext. 52337 toll free, (314) 819-0464
Securities and Investment Advisory Services offered through Woodbury Financial Services, Inc., Member FINRA, SIPC, and Registered Investment Advisor. Warren Wealth Management and Woodbury Financial Services, Inc. are unaffiliated entities.
Content provided by Peter Montoya, Inc. These are the views of Peter Montoya, Inc., not the named representative or Woodbury Financial Services, Inc., and should not be considered investment advice. Neither the representative or Woodbury Financial offer tax or legal advice. All information is believed to be from reliable sources; however, the publisher makes no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting, or other professional services. If expert assistance is needed, the reader is advised to work with a competent professional. Consult your representative for further information.
Citations.
1 blogs.moneycentral.msn.com/topstocks/archive/2008/05/12/could-a-2008-2009-recession-wipe-out-seven-million-jobs.aspx [5/12/08]
2 pbs.org/wgbh/amex/reagan/peopleevents/pande06.html [8/08]
3 the-privateer.com/chart/dow-long.html [8/08]
4bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=1981&LastYear=1982&3Place=N&Update=Update&JavaBox=no#Mid [7/31/08]
5 marketwatch.com/news/story/have-you-gone-paul-volcker/story.aspx?guid=%7BFC39F929-B835-431D-90E7-C48585790133%7D [8/22/07]
6 inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=2 [8/08]
7 answers.com/topic/closing-milestones-of-the-dow-jones-industrial-average [8/08]
8 answers.com/topic/s-p-500 [8/08]
9 quotes.nasdaq.com/aspx/StatisticalMilestones.aspx [8/08]
and the rewards for the patient investor.
presented by Jacob Warren
The numbers. This 15-month recession represented the biggest struggle for the Reagan administration during its first term. People often remember this deep recession in terms of unemployment: in 4Q 1981, 10.5% of Americans were out of work; 28% of teenagers and 20% of African-Americans were without jobs.1 That was the highest unemployment rate since the Great Depression; to top it off, 17,000 businesses failed during the downturn.2 A bear market was firmly in place: the Dow Jones Industrial Average hadn’t topped the 1,000 mark in five years.3 GDP fluctuated from quarter to quarter – between 2Q 1981 and 3Q 1982, it ranged from 4.9% to -6.4%.4
The reasons. While a brief recession did occur in 1980, historians commonly attribute the 1981-82 recession to the “tight money” policy adopted by the Federal Reserve. During the late 1970s, the U.S. was experiencing double-digit inflation. Fed chairman Paul Volcker spearheaded a policy decision to slow the growth rate of the money supply to combat inflationary pressures. The Fed set interest rates higher and higher –by December 1980, the prime rate had hit its all-time high, 21.5%. Volcker’s radical stance was painful for the banking sector, the real estate sector, and the overall economy.5 But there would be a spectacular upside.
The rebound. In March 1980, inflation approached 14.8%. By July 1983, it was under 2.5%, and it would stay in single digits for the next quarter-century.6 The Dow would gain 1,500% over the next 17½ years, rising from an August 1982 low of 777 to 11,722.98 in January 2000.7 The S&P 500, which had last topped 100 in 1968, would hit 200 for the first time by Thanksgiving of 1985.8 The NASDAQ Composite Index, which had reached the 200 mark in 1980, would reach 300 for the first time in May 1983 and 400 in May 1986.9 By the mid-1980s, unemployment levels had notably dropped and GDP was back in the positive column.
The lesson. After almost a decade of gloomy economic headlines and a staunch bear market, Americans were quite pessimistic about stock market investment and the future of the economy at this point. But the markets do recover, often more quickly than we imagine – and as this example shows, historically the persistent investor has been rewarded for his or her optimism. Today, it helps to take a satisfying look back and see how the markets have rebounded and prospered since economic downturns and detours like these.
Jacob Warren
Warren Wealth Management
111 West Port Plaza Drive, Ste 300, Saint Louis, MO 63146
(866) 463- 0752 ext. 52337 toll free, (314) 819-0464
Securities and Investment Advisory Services offered through Woodbury Financial Services, Inc., Member FINRA, SIPC, and Registered Investment Advisor. Warren Wealth Management and Woodbury Financial Services, Inc. are unaffiliated entities.
Content provided by Peter Montoya, Inc. These are the views of Peter Montoya, Inc., not the named representative or Woodbury Financial Services, Inc., and should not be considered investment advice. Neither the representative or Woodbury Financial offer tax or legal advice. All information is believed to be from reliable sources; however, the publisher makes no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting, or other professional services. If expert assistance is needed, the reader is advised to work with a competent professional. Consult your representative for further information.
Citations.
1 blogs.moneycentral.msn.com/topstocks/archive/2008/05/12/could-a-2008-2009-recession-wipe-out-seven-million-jobs.aspx [5/12/08]
2 pbs.org/wgbh/amex/reagan/peopleevents/pande06.html [8/08]
3 the-privateer.com/chart/dow-long.html [8/08]
4bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=1981&LastYear=1982&3Place=N&Update=Update&JavaBox=no#Mid [7/31/08]
5 marketwatch.com/news/story/have-you-gone-paul-volcker/story.aspx?guid=%7BFC39F929-B835-431D-90E7-C48585790133%7D [8/22/07]
6 inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=2 [8/08]
7 answers.com/topic/closing-milestones-of-the-dow-jones-industrial-average [8/08]
8 answers.com/topic/s-p-500 [8/08]
9 quotes.nasdaq.com/aspx/StatisticalMilestones.aspx [8/08]
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Recession Recoveries: 1981-82
Posted: 06/07/2010
Posted: 06/07/2010