It was August 17, 1982, and Dr. Doom had changed his mind.
Economist Henry Kaufman, then at Salomon Brothers, had come to be known by the comic-book moniker for his gloomy but influential forecasts of spiraling interest rates and inflation. But now he released a morning memo predicting that interest rates would decline over the coming year and “inflation expectations will erode gradually.”
That was about all that was needed to send both stocks and bonds into a rally that day. The Dow Jones Industrial Average gained a record 38.81 points to close at 831.24. The next day, for the first time ever, more than 100 million shares traded on the New York Stock Exchange. And by the end of 1982, the Dow had surged past the 1,000 line and was not looking back.
The roaring eighties had begun.
From Bust to BoomThe decade’s inception had been less auspicious. The 1980 presidential campaign was shadowed by the “misery index,” a number combining rates for inflation and unemployment. As the November election approached, the misery index pushed above 20, a level not surpassed even in the troubled 1970s. At an October 28 debate, Republican candidate Ronald Reagan asked voters: “Are you better off than you were four years ago?” A week later, Reagan defeated Democratic incumbent Jimmy Carter by 50.75 to 41.01 percent (independent John Anderson got much of the rest).
The Dow, which had been gaining strength gradually in the months since its April 21 nadir of 759.13, ticked upward with the election, and then pushed to 1,000.17 on November 20, its first close above the 1,000 line in the 1980s. But it wouldn’t stay there long, and repeated rallies to just above 1,000 in 1981 were similarly short-lasting. Much as in the 1970s, having four digits on the Dow in front of the decimal point seemed like an invitation to take your modest gains and pull some money out of the market.
And yet, even in the decade’s early doldrums, there were signs of formidable potential in emerging technology industries. On October 14, 1980, Genentech became the first publicly traded biotech company, offering shares at $35 that soon surged to $89. On December 12, Apple Computer went public, selling 4.6 million shares at $22 apiece in the largest stock offering since Ford Motor Company listed its shares in 1956.
Such bright spots were the exception, though. The Federal Reserve, led by Chairman Paul Volcker, was clamping down on the money supply in an all-out effort against double-digit inflation. The prime rate surged to 21.5 percent in December 1980 and would be above 18 percent for most of the following year. An effigy of Volcker was set aflame on the steps of the Capitol, and a union of bricklayers sent him bricks symbolizing houses they had been unable to build in the harsh credit environment.
By September 1981, the Dow was hovering below 850 and the economy was heading into a deep recession. President Reagan’s popularity plunged along with Volcker’s. However, the president, though he was known to occasionally ask whether we really need a Federal Reserve, did not criticize Volcker or call for lower interest rates. The Reagan administration’s economic focus in 1981 was on cutting taxes and restraining the growth of spending. The following year, the administration partly reversed itself with tax hikes, but kept tax rates on income and capital gains well below their 1970s levels.
By late 1982, inflation and interest rates were moving steadily downward. Dr. Doom had made a good call in his morning memo of August 17. Moreover, the recession, as later determined by the National Bureau of Economic Research, ended in November of that year. The stock market continued its upward path over the course of 1983. A retreat in the summer brought the Dow to 1,163.06 on August 8. But soon the index was back above 1,200, and it closed the year at 1,258.64.
The market moved sideways in 1984, but at no moment in that year did the industrial average slip below, or even come particularly close to, the 1,000 line. The era of the three-digit Dow was over. Gross domestic product expanded over the course of 1984 at a brisk 7.2 percent and inflation remained in low single digits. Unemployment, though high by historical standards, was on a clear downward trend, and the misery index fell below 12 percent. President Reagan, running on a slogan of “Stay the course,” won reelection handily over former Vice President Walter Mondale.
Equities were now poised for bigger gains. The Dow gained fairly steadily over the course of 1985, closing the year at 1,550.46. It surged in early 1986, pushing above 1,700 by the end of February. The average spent most of December above 1,900, closing the year at 1,895.95. And on January 8, 1987, the Dow closed at 2,002.25, ending above the 2,000 line for the first time.
Other market indexes were also on the rise. The S&P 500, which had stood around 105 at the start of 1980 — little changed from its levels of the late 1960s — crossed the 300 line on March 23, 1987. The Nasdaq Composite, which stood below 150 at the start of the 1980s, crossed the 450 line on August 13, 1987.
And the Dow, rather than taking a breather as some expected after 2,000, continued to reach new heights. It pushed above 2,100 on January 19, above 2,200 on February 5 and above 2,300 on March 20. The average moved past 2,400 on April 6 and, pausing only slightly, hit 2,500 on July 17. Two more 100-point markers fell in quick succession, as the index closed above 2,600 on August 10 and above 2,700 on August 17.
But the Dow would not see the 2,800 milestone during the 1980s.
Crash TimeBy mid-October, the market was looking shaky. On Wednesday, October 14, the Dow dropped 95.46 points, then a record, to close at 2,412.70. The next day, it fell another 58 points. That weekend, many investors worried about their holdings, and rightly so. The next day, the Dow dropped by a harrowing 508 points to 1,738.74, an unprecedented 22.61 percent single-day collapse. Henceforth, October 19, 1987 would be known as Black Monday.
The causes of the 1987 crash remain a subject of uncertainty and debate. Program trading, with computers automatically set to sell shares under particular conditions, has been widely cited as a factor, as has portfolio insurance, in which traders sell a stock index short in order to hedge their portfolio. (The term “portfolio insurance,” in fact, became a lot less popular after Black Monday.)