The US stock market 1948 - 1999
As it was presented in the introduction, there is no full correlation between thriving US economy and the valuation of the stock market. The US stock market indexes, that mirror the second, have been overtaking economic growth definitely. Let us consider what is the factor, which originated this process? Is it something permanent and last until now?
The period of boom on the stock started after World War II. It was based on strong economic fundamentals, technological advances, and optimism. Along with improved standard of living a vast array of consumer goods appeared. With more and more money spending by people, companies grew and so did price of shares on the stock market, though still mildly - stocks were not popular. However, soon numerous investment banks and brokerage houses appeared. They promoted the safety and soundness of investing in the new environment. Since the mood of society was upbeat and there was nothing upsetting on the horizon, the stock market was back in grace. Although interrupted by Eisenhower's heart attack in 1955, launching Sputnik, the Russian unmanned satellite in 1957, The Kennedy Panics in 1962 (Kennedy engaged in confrontation with U.S Steel on price increase), Dow Jones Industrial Average, grouping 30 the most important companies in the USA, rose from 177,3 in 1948 to 787,79 in 1966.[1]
The years 1966 - 1982 with the Vietnam War, Watergate scandal, OPEC oil embargo, Nixon's resignation and the attempted assassination of Ronald Reagan was not good for the USA. Copying the reality, for 16.5 years the Dow Jones was in the bear market, falling from 924,77 on January 3, 1966 to 901,31 on August 3, 1982.[2]
The period between 1948 and 1982 brought the Dow Jones gain 724 pct or 409%. Allowing for cumulative inflation during that period (297,9%)[3], the real rise of the Dow Jones amounted to 111,1%, averaging out 3, 27% yearly. With the single-digit average real GDP in the analogical period of time, it was not a shocking performance.
US GDP growth rate 1947 - 2010[4]
In August 1982 president Ronald Reagan lowered taxes and increased defense spending, igniting the economic boom. It found find the reflection in the US stock market indexes. They entered the bull market, which was the longest in the US history, lasting until 1999. From 1982 until late 1999 the Dow Jones gained 1.300%, bringing investors the yearly return of 16.38%. It took place despite the fact that the country in the meantime experienced such shocks as Iran-Contra hearings, 87' Crash "Black Monday", Gulf War, and the Russian debt default.[5] It leads to conclusion that the optimistic “bull market” we are perceiving now originated just then.
[1] http://research.stlouisfed.org/publications/review/07/03/BordoWheelock.pdf
[2] http://finance.yahoo.com/echarts?s=^DJI+Interactive#chart8:symbol=^dji;range=19651001,20100422;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on
[3] http://inflationdata.com/inflation/Inflation_Calculators/Inflation_Calculator.asp#calcresults
[4] http://www.data360.org/dsg.aspx?Data_Set_Group_Id=354&count=25
[5] http://www.chartresearch.com/SecularDow8299.htm
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