Recession Recoveries: 1981-1982

What happened, how the markets came back, and the rewards for the patient investor.

 

 

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.

 

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]

 

 

Comments

[Griff (Financial Freedom 5G Team)]

Interesting take. I enjoy hearing about history and the optimism that it can bring, but part of me thinks that today is a little different. I hope I'm wrong, but we are deep deep deep in over our heads in regards to the national debt and the value of our money in the future. I'm a little pessimistic, but I appreciate your reminder that things bounce back and I am definitely going to think like an optimist by investing my money asap.