Thriller, ET, the opening of Epcot Disney World – culturally speaking, 1982 was evidently a seminal year. But is there another reason for middle-aged fund managers to be dreaming wistfully of their halcyon youths?
The chart below shows what the S&P 500 index did last time the seasonally adjusted US unemployment rate rose above 10 per cent (the level it stands at now).
(Sources: U.S. Bureau of Labor Statistics, Bloomberg)
So, unemployment rate above 10 per cent = 40 per cent plus stock market rally?
Alas, there are some other factors to take into account before the rally monkey can don a “10%!!!” t-shirt and start gyrating to Duran Duran.
We will leave aside the debate over attempting to draw correlations between a lagging economic indicator such as unemployment and the supposedly forward looking stock market, because there are several other good reasons to raise a quizzical eyebrow.
First, the federal funds rate had hit a high of 20 per cent in June 1981, and stood at 15 per cent by March 1982 as the presiding Fed chairman Paul Volcker pressed on with his policy of smothering inflation. By December 1982, interest rates had slid back down to 8.5 per cent.
At the same time the upward pressure on consumer prices present during a decade-long period of US stagflation was easing in response to falling commodities prices and stiff monetary policy. US consumer price inflation was at 5.9 per cent in August 1982; by June 1983 the reading had dropped to 2.6 per cent.
Moreover, in 1982 the market rally was starting to stir just as inflation expectations were easing. Today’s Leviathan of liquidity, combined with a gradually normalising transmission mechanism has stoked inflation expectations.
Bond markets are starting to price in higher prices, while the Fed, ECB and Bank of England have pledged to keep interest rates low for the mid-term at least. Gold continues to breach new all-time highs.
In short, the macroeconomic outlook in 1982/3 would have appeared more encouraging, and more certain, than the fag-end of the twenty first century’s first decade.
Best keep those disco pants locked safely in the closet.
Related links:
The S&P is heading for 800 – FT Alphaville
Of bonds and stocks and the Weimar Republic – FT Alphaville
Taleb goes long inflation – FT Alphaville