Looking at Wall Street's Record in the Reagan-Bush Era
WALL Street is poised for continuous but slower gains in stock prices following the imminent end of the Republican Reagan-Bush era, stock brokers say.
"The future will be shaped to a major degree by the past," says Arnold Kaufman, editor of Standard & Poor's "Outlook," a financial publication. "The [financial] excesses of the 1980s, such as the high level of public and private debt, will create constraints on economic growth." That could restrain returns on investment well into the mid-1990s.
The GOP era of the 1980s was somewhat reminiscent of the Republican-dominated 1920s, market technicians say. That earlier decade was characterized by consolidations among United States corporations (often "takeovers" and "leveraged buyouts" in the 1980s), pell-mell financial speculation (comparable to the proliferation of junk bonds in the latest decade), and booming profits for investors.
On Jan. 30, 1981, shortly after Ronald Reagan took office, the Standard & Poor's 500 stock index stood at 129.55 points. It is now in the 418 range, "having more than tripled," Mr. Kaufman notes. Similarly, the Dow Jones industrial average stood at 947.27 points on Feb. 2, 1981. It is now in the 3,200 range. Factoring in appreciation and dividends, the stock market produced an average return of about 15 percent in the 1980s, says Kaufman; but he says that the average return for the decade of the 1990s wi ll be closer to 10 percent, given the slower-growth economy.
With all the current attention on recession, it is easy to forget how dramatic the past dozen years have been. The Reagan-Bush years saw the rise of countless new forms of investing, from junk bonds to exotic types of index and futures trading, computerized program trading, global market systems, and the emergence of the mutual fund industry "as the primary vehicle of investing for most Americans," says James Stack, publisher of InvesTech, a market newsletter. "During the 1980s, more mutual funds appeare d on the scene than there were companies listed on the New York Stock Exchange. It was also a period of enormous innovation" for Wall Street.
It was a time of excess and turbulence as well, underscored by the insider trading scandals of the late 1980s and two market crashes, a major downturn in October 1987 and a smaller decline in October 1989.
Regulators and jurists face new challenges in overseeing professional money managers: The concept of what now constitutes a "prudent" investment portfolio has greatly expanded in recent decades to encompass legal concepts that allow a certain degree of risk, say economic historians such as Marshall Blume, professor of finance at the Wharton School of the University of Pennsylvania in Philadelphia.
At the end of the last century, Dr. Blume notes, financial trustees would look at each component of an investment portfolio to see how the components performed; by the early 1950s, trustees would look "at the behavior of the portfolio," rather than the individual components. This allows for greater diversity in the components - such as having a mix of stocks and bonds, or more exotic investment instruments. By the time of the enactment in 1975 of the federal law regulating pension funds, trustees and jur ists focused on the interaction of components in the entire portfolio, says Blume; that broader viewpoint helped pave the way for the financial innovations of the 1980s, such as the rise of the junk bond market. But that fostering of diversity also provided some added risk for investors.
"We are now in a far less effusive economic environment, and [market] excesses that looked so normal in the 1980s appear far less so today," says Larry Wachtel, a vice president with Prudential Securities Inc.
Kaufman predicts the period ahead will see less reliance on exotic forms of investing and a return to traditional investing - common stocks.