Understanding the U.S. Bull Market from 1974 to 1987: Why and How
The period from 1974 to 1987 is often referred to as one of the most impressive bull markets in U.S. history. However, the analysis of this market boom is complex and varies depending on the perspective used. This article aims to unravel the reasons behind the strong performance of the U.S. stock market during this time, taking into account both economic and financial factors.
Understanding Historical Market Performance
The performance of the U.S. stock market during the early 1980s is often viewed through the lens of two distinct periods. When analyzed with adjustments for inflation, the market appears to have been in a severe bear market during this period. However, when looking purely at nominal gains, the period appears to have been quite successful.
The Dow Jones Industrial Average (DJIA) chart from 1974 to the summer of 1982 exhibits a significant decline when adjusted for inflation. The rampant inflation of the 1970s eroded the purchasing power of the dollar, making many Americans feel that the stock market was not performing well. During this period, the economy was marked by high unemployment, high inflation, and poor productivity growth. The term "stagflation" was coined to describe this unique economic situation.
Economic and Financial Factors
Despite the economic difficulties, the stock market experienced a strong recovery and growth during the later part of the 1980s. Several factors contributed to this turnaround:
1. Inflation and Interest Rates
The U.S. dollar experienced devaluation due to rampant inflation. The Federal Reserve responded by raising interest rates to extremely high levels in an attempt to curb inflation. While this policy led to a decrease in consumer spending and borrowing, it also increased the attractiveness of the stock market as a way to earn double-digit returns. High-interest rates made traditional savings vehicles, such as certificates of deposit (CDs), less appealing. Investors sought higher returns, driving up stock prices.
2. Decrease in Investment Opportunities
Another factor that contributed to the bull market was the decrease in opportunities to invest in real production. As production costs increased, it became more challenging for businesses to manufacture goods and services at a profit. The rise of financialization in the economy transformed the way businesses operated and invested. Companies began to shift their focus from physical production to financial activities, such as trading and investing in financial markets. This financialization of the economy led to an increase in the demand for stocks and other financial assets.
3. Economic Policies
The late 1970s and early 1980s saw significant economic policies and reforms. President Ronald Reagan's administration brought about a series of tax cuts and deregulation efforts. These policies aimed to stimulate economic growth by reducing government intervention in the business sector. The deregulation of key industries, such as telecommunications and financial services, opened up new opportunities for investment. This economic liberalization contributed to the overall strength of the stock market during the 1980s.
Conclusion
The U.S. bull market from 1974 to 1987 was a complex phenomenon driven by a combination of economic, financial, and policy factors. While the period was marked by high inflation and economic challenges, the stock market experienced a robust recovery and growth. The allure of high-interest rates, coupled with the financialization of the economy and supportive government policies, fuelled the bull market. Understanding these factors is crucial for comprehending the historical and contemporary dynamics of the U.S. stock market.