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May 29, 2013
Rhyming with the 1982 Run
History rarely repeats, but often rhymes. Such is the case with the contemporary bull market and the stock
market run during the 1980s. We are not suggesting the current bull market will play out just like the
1980s stock market. However, its eerie similarity to date is worth noting, and if this continues, perhaps
some “rhyming character nuggets” can be gleaned from examining the behavior of the 1982 bull market.
Both bull markets had similar origins
Both the 2009 and 1982 bull markets were preceded by similar events. Both derived from almost a
decade of trend-less stock market churning and severe market corrections. In late 1982, the U.S. stock
market had not really gone anywhere since the end of the 1960s and had experienced gut-wrenching bear
markets in 1970, 1973, 1974 and the only double-dip recession (1980 and again in 1982) in post-war
history. Similarly, the start of 2009 bull market came after almost a decade of sideways stock market
action punctuated by two of the deepest (2000 and 2008) bear markets in the post-war history.
Both also were born in the aftermath of a severe financial crisis. The 1980s economic recovery
commenced without the industry leaders of the 1970s—agriculture, energy, and mining—under the
weight of massive balance sheet defaults. The 1980s recovery also transpired amidst a global financial
crisis (i.e., the third world debt crisis) which, in combination with several bad domestic debts, embroiled
most of the financial institutions within the U.S. Similarly, the contemporary bull run was born in
what most perceived as the worst recession in post-war history, among a financial crisis centered in
the housing industry. Like the early 1980s, the 2008 crisis was both global, based on bad debts and its
epicenter was the financial industry.
The 1982 recession produced the highest unemployment rate in post-war history. The 2008 recession
produced the second highest unemployment rate. The price of crude oil surged in the 1970s from about
$2 to an unheard of $20. In the 2000s, crude oil prices surged from about $20 to $100! The end of the
1982 recession produced the largest and at the time, simply frightening, post-war government deficit as
a percent of GDP of almost 6%. After the 2008 recession, the deficit reached a post-war high of 10.5%.
In the entire post-war era, the investment culture had never seen anything like the 21% prime interest
rate reached in the early 1980s. Similarly, in the aftermath of 2008, nobody had experienced a zero shortterm interest rate environment. The cultural fear produced by the previous decade in the early 1980s was
runaway inflation—today, in the contemporary period, the great fear has been runaway deflation.
Since the 1982 and 2009 bull markets were preceded by similar events, the dominant investment culture
at the beginning of both cycles was also similar. The overwhelming mindset in both cases was fear. Fear
that irreparable damage had been done to the economy leaving little confidence in the future. Indeed,
when the stock market initially took off in August 1982 and again in March 2009, there was little belief
it would persist and in both cases this doubt persevered.
Economic & Market Perspective Update
Overlaying the 2009 and 1982 bull markets
Chart 1 overlays the contemporary stock market run with the early-1980s bull market. In the first
four years and two months, these two bull markets have been remarkably similar. In both instances,
the S&P 500 Index rose by about 150%! However, their respective price action has diverged. For
example, the 2009 rally was stronger between mid-2010 to mid-2011 compared to what the 1982 rally
did during 1984. Similarly, the early-1980s run was stronger during the late-1985 to early-1986 period
compared to the period between March 2012 and October 2012. Overall, although not perfect, no other
combination of bull market cycles in the post-war era have rallied by this much and this closely during
the first four years.
Chart 1
U.S. Stock Market
2009 Bull Market vs. 1982 Bull Market
Both Indexed at 1.0 at Bear Market Lows
2009 Bear Market Low on March 9, 2009
1982 Bear Market Low on August 12, 1982
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May 29, 2013
Now in the fifth year of the run.....
Not only has the stock market performed similarly, but today, four years and two months into this bull
market, the “character” surrounding the stock market is also surprisingly similar to what existed at the
same point (October 1986) in the 1980s bull run. Exhibit 1 illustrates several comparisons between the
contemporary period and the 1980s cycle at this same point in the recovery.
Exhibit 1
Although the pace of economic growth was stronger in late 1986, like today, it was not considered
“strong.” Today, real GDP growth in the last year is only 1.8%. While stronger in 1986, it was still a
relatively weak 2.8%. Moreover, the unemployment rate at this point in the 1980s recovery was also still
above 7% and job growth in the last year is nearly identical with what it was in 1986. Additionally, the
inflation rate in 1986, like today, was below 2%. Also similar to today, consumer confidence in 1986
was below average and not much higher than it is currently. Finally, there were also widespread “deficit
worries” in 1986 as there are today (and the deficit is only 0.8% different) and the rate of growth in
the money supply (despite all the contemporary concern the Fed has over-eased) was actually slightly
stronger in 1986 than it is today.
Perhaps most surprising, is how close the fundamental character of the stock market (i.e., profit growth and
valuation) is today compared to where it was at the same time in 1986. Today, corporate profit growth has
been fairly weak—rising by only 3.1% in the last year. In 1986, similarly, profit growth was also weak—
indeed, profits had actually declined by 6.6% in the previous year. Finally, the current price-earnings (PE)
multiple of the S&P 500 Index (at 16.1) is nearly identical with the PE multiple at the four year, two month
mark of the 1980s bull market!
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Economic & Market Perspective Update
Implications???
The 1980s bull run is not a blueprint for the contemporary stock market cycle. There have been and there
will continue to be considerable and significant differences. However, both the character and performance
of the current bull market has enough similarities to the 1980s recovery to simply ignore.
Both bull markets were born out of a flattish, financial-crisis prone decade, both produced one of the best
bull runs of the post-war era driven continuously by a “perpetual wall of worry,” and both, at the four year,
two month mark were acting similarly within an economy exhibiting similar character. So, will the next
few years continue to rhyme with the 1980s cycle?
At this time in 1986, the economy was “soft” but growing. However, the stock market was only months
away from a surge in 1987 which saw the stock market rise by more than 40% in the first nine months of
the year. At the same time, the 10-year Treasury bond yield rose from about 7% at year-end 1986 to a high
above 10% briefly in October 1987. Several years after the double-dip, early 1980s recessions and crisis,
the “Armageddon” ghost was finally given up in 1987 as investors rushed to get on board a bull market
which was already four years old and 150% higher than it was at its start. Confidence rode through the
stock market in the form of higher valuations (the PE multiple rose from a little over 16 in late 1986 to 20
times at the 1987 top) led by cyclical-oriented stocks and through the bond market in the form of higher
yields. Finally, while few were imagining any near-term end to the Fed’s easing campaign in late 1986
(when real GDP growth was only 2.8% and with the unemployment rate still above 7%), the Fed would be
raising rates significantly within just a few months.
Already, today is rhyming with the 1986-1987 period. Beginning late last year, as the economy’s
performance began broadening (i.e., even though its growth rate is still slow, the economy is firing on
more cylinders than ever including a persistently falling unemployment rate, rising bank lending, rising
housing activity and home prices, improving confidence, much lowered debt service burdens, record high
state tax collections, a melting federal deficit as a percent of GDP, and signs of U.S. energy independence)
the Armageddon ghost is finally being thrown aside as confidence rises to new highs for the recovery.
Confidence is running through the stock market in the form of rising PE multiples, through the gold market
in the form of a lessening of the crisis premium embedded in the gold price, through the junk bond market
as evidenced by the tightest yield spreads of the entire recovery and finally through the European investment
markets illustrated by a 10-year Greece government bond yield of only about 7% today compared to almost
40% a couple years ago.
While we do not expect the PE multiple on the S&P 500 to rise to 20x in the next year (as it did in 1987),
we do think the 10-year U.S. bond yield may surge higher (towards 3% before year-end?) as confidence
also runs through the bond market. Overall, it is very unlikely we will have a replay of the 1987 boom and
bust. However, “something which sounds a bit like it” may well be in the offing. Unlike 1987, we think the
stock market may have already experienced most of its near-term surge and may be range-bound during
the balance of this year. Like 1987, current economic growth will likely prove better than expected keeping
stocks from falling too much, and bond yields will likely increase probably keeping stocks from rising much.
However, similar to 1987, we do expect significant upward pressure on bond yields, for the stock market to
be led more by economically sensitive rather than defensive or interest-sensitive stocks and for discussion
surrounding the Fed to become more critical and demanding that the Fed start to normalize monetary policy.
Let the rhyme continue—the 1980s bull persisted far beyond 1987. We are not expecting à la 1987 40%
surge in the stock market and a 3% rise in bond yields followed by a collapse in the next year. But perhaps,
as throughout this recovery cycle, we may already be experiencing something which rhymes with 1987.
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