What happens the next time stocks take 30 years to get back to their present value?
One of the key factors in American politics, culture, and economics over the past 40 years has been the largely sustained — subject to a couple fairly notable exceptions, as Alan Greenspan would say — run-up in stock prices. Since it bottomed out in the summer of 1982 the Dow Jones index has increased 17-fold in value in inflation-adjusted terms.
Now there were a couple of major blips in there: it took eight years for the market to get (almost) back to the peak it reached at the end of 1999 — again these numbers are inflation-adjusted — and then another six years to get back those gains again, after the crash at the beginning of the Great Recession in the fall of 2007.
But for four decades now it’s been on the whole a pretty sweet ride. And it has needed to be, since it’s during this period that the defined-benefit pension has been almost completely replaced by 401(K), Roth IRA, etc. defined contribution plans, in which the employee’s retirement income is hinging completely on on how the financial markets perform. And this as a practical matter is even true for the public employees who still have traditional defined benefit pensions, since the big state pension plans are so heavily invested in the stock market that any serious long-term decline is going to make it impossible for them to pay out the benefits they owe contractually, at least not without big tax increases, which as we know is a form of socialism, which is un-American.
But for those whose memories run back earlier than the 1980s, the period between the Roaring 20s and the early Reagan years held a couple of eerily similar long-term historical lessons.
That is, it twice took stock prices thirty full years to recover their previous peak:
(1) After the market crashed in the fall of 1929, stocks didn’t get in real inflation-adjusted terms back to their pre-crash high again until 1959.
(2) Then, after stocks peaked at the end of 1965, they slid downward pretty much non-stop for the next sixteen years, bottoming out in the summer of 1982, and not reaching their December 1965/January 1966 high again until October of 1995.
ETA: In response to a couple of comments, the S&P 500, which is a much broader-based index follows very much the same historical pattern as the Dow in this regard.
I’m no prophet, and I don’t know nature’s way, but it doesn’t take much imagination to consider that, with the spot of fascism we’ve been having lately, a 16-year slide in stock prices, that isn’t fully recovered from until 2052 isn’t something that either the American economy, with all its “defined contribution” pension plans, or the American political system, with all of its increasingly curdled ethno-nationalist “economic anxiety,” are capable of handling right now.
I’d mention climate change’s relation to this possibility but I’m currently looking for my lost shaker of salt.