Market watch

OPINION:

Something extraordinary happened 25 years ago tomorrow — 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 long-term gains. The Dow closed at 13,271 Thursday; 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, price-earnings 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.