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.)
A weakening dollar also has been fingered as a possible cause. Inflation, interest rates, the trade deficit and oil prices all had been pushing upward, and there was tension between the United States and major trading partners such as Germany about allowing the dollar to fall. Over the weekend, Treasury Secretary James Baker had hinted that the U.S. government was not eager to prop up its descending currency. In any event, the dollar-linked Hong Kong stock exchange went south early on October 19.
There were other things going on that could have weakened investor confidence as well. Wall Street was increasingly embroiled in scandal. Takeover speculator Ivan Boesky had pled guilty to insider trading charges and was awaiting sentencing. Arrests for dealing cocaine at some investment firms didn’t help improve the financial industry’s image, either. And in Congress, there was talk of imposing new restrictions on the booming field of mergers and acquisitions.
Plus, in case all that wasn’t enough to dampen market sentiment, Iranian missiles hit a U.S.-flagged oil tanker off Kuwait on October 16, and U.S. warships retaliated by shelling an Iranian offshore oil platform on Black Monday’s morning.
On Tuesday morning, the Fed, under Chairman Alan Greenspan, who had replaced Volcker barely two months before, issued a brief statement: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”
That statement seems to have helped bolster the market. The NYSE staged a rebound at its opening, even though foreign exchanges had dropped in earlier trading. The Dow closed Tuesday at 1,841.01, a gain of more than 102 points, on record volume of 608,100,000 shares, exceeding even the volume of Black Monday. On Wednesday, October 21, the Dow closed at 2,027.85. Still, the index would stay mostly below 2,000 for the rest of the year.
Decade’s EndThe market was choppy but trended gradually upward in 1988. A big financial story late in the year was the battle for control of RJR Nabisco, ending with its leveraged buyout by Kohlberg Kravis Roberts. In political news, Vice President George H.W. Bush beat Massachusetts Governor Michael Dukakis in the presidential race. The misery index was now below 10, halved from the decade’s start. The Dow closed the year at 2,168.57.
Share prices rose briskly for most of 1989. By late May, the Dow had closed above the 2,500 level. In August, it moved beyond the 2,700 line and was back in territory not seen since before Black Monday.
In October, there was a Friday the 13th “mini-crash,” with the Dow dropping 190 points to 2,569.26. The failure of a leveraged buyout deal for UAL Corp., United Airlines’ parent, may have helped bring this about. Plus, turmoil in the market for high-yield bonds, increasingly known to the public as “junk bonds,” had been threatening to spill into financial markets more generally, especially after the March indictment on assorted securities charges of Michael Milken, visionary of the high-yield field.
Nevertheless, the ongoing trend was upward, a fitting cap to a prosperous decade. The Dow was back above 2,700 by late November, and it ended the year on Friday, December 29 at 2,753.20. Then, on the following Tuesday, January 2, the very first trading day of the 1990s, the Dow closed at 2,810.15, breaching the 2,800 barrier at last.
The 1980s had barely departed when many commentators began dubbing them a “decade of greed.” Left-leaning author Barbara Ehrenreich did much to promote that phrase with her 1990 book The Worst Years of Our Lives: Irreverent Notes from a Decade of Greed.
Such sentiments played strongly into the new decade’s first presidential race. In an October 1991 speech at Georgetown University, candidate Bill Clinton asserted that “the 1980s ushered in a gilded age of greed, selfishness, irresponsibility, excess and neglect.”
Republicans sought to rebut such claims, referring to the 1980s as a “decade of growth” and pointing out that charitable giving had been robust during that era. Still, the accusations of greed struck a resonant chord with voters amid the weak economy of the early 1990s, helping push President George H.W. Bush into unplanned retirement.
Later in the 1990s, as the tech boom brought new prosperity and a soaring stock market, whether the eighties were a decade of greed became less of a hot-button topic.
Kenneth Silber is a senior editor at Research. His work on science, economics and history has appeared in a variety of publications, including The Wall Street Journal.