Bear Markets: 1980

If you are looking for an example of a “V-shaped” recovery from a bear market in stocks, look no further than the bear market of the early 1980s. This bear arrived towards the very end of 1980 and bottomed out in August of 1982; a 25% decline over 20 months. The economic malaise that was the late 70s/early 80s had many unique characteristics. It was also a great example of a “double-dip” recession. The US economy was technically in a recession from January to July of 1980 and then again from July 1981 to November 1982. This period was so economically precarious that a new term entered the financial lexicon to describe the situation: stagflation. Prior to the 1970s it was assumed by many economists that it was not possible to have high unemployment and high inflation at the same time. But in 1980 that is exactly what we saw; inflation and unemployment reached double digits in the US economy. In fact, for the entire decade of the 1970’s unemployment averaged 6.3% and inflation averaged 7.4%

The inflation factor during this period cannot be overstated. Examining the economic data is a bit like looking into a funhouse mirror. The S&P 500 earned 34% cumulatively over the 1970s but adjusted for inflation, the real return was actually -34%! There were several contributing factors that gave rise to the increase in prices in our economy. One obvious factor was the increase in the price of energy. Due to conflicts in the Middle East the price of oil rose to heights in the late 1970s that would not be seen again until 2008.

To combat the inflation in the economy the fed rose interest rates steadily throughout the 1970s. But it wasn’t until Paul Volcker became chair of the Fed that interest rates rose forcefully. When Volcker took over in August of 1979 the fed funds rate stood at 11%. By March of 1980 it was at 20% and wouldn’t start to decline until June of 1981.

All bear markets are accompanied by some eye-catching headlines in the news. This one was different. The two biggest events that happened towards the end of 1980 were the election of Ronald Reagan as the 40th president of the US and the shooting of John Lennon. Only three months after Reagan was sworn into office, he too was shot, but avoided the same fate as the famous Beatle. Later that summer the AIDS epidemic started in the US. By this time, the US had entered a severe recession and as 1981 came to a close, the unemployment rate in the US had reached 8.5%

The headlines for the market in 1982 didn’t start off any better. One of the oldest and most recognizable names in the S&P 500 was forced to divest itself.  AT&T had been accused of violating anti-trust laws for decades, but it wasn’t until 1982 that the century-old company was finally forced to break itself apart.

For stocks, things finally bottomed out in August of 1982 and gained 35% in the second half of that year! It took the S&P 500 just 93 days to get back to its previous high: a classic “V-shaped” recovery. There were many things that led to the recovery, but many historians point to two major themes. One was the Fed’s policy to aggressively attack inflation in the economy. The other was a trend of deregulation in many industries, but notably in transportation. Airlines, trucking, and railroads were all significantly deregulated and led to much more competition. As a result, fares for shipping costs fell which allowed firms to lower prices of all kinds of goods.

Most bear markets fall a lot faster than they recover. The bear market of 1980 is a bit of an anomaly in that sense; it was a long slow decline followed by a very quick recovery.  The challenges our economy faces today are much different than those of the double dip recession in the early 1980’s. Then, the economy had been struggling for quite some time leading up to the bear market. Today it is almost the exact opposite. Markets had been going strong up until the pandemic hit. It is certainly an advantage to us now that our economy was so strong entering the bear market of 2020.