By Sam Stovall With the recent passing of America's 40th President, Ronald Reagan, I decided to take a look at investment performances during his two terms in office, 1981-88. (Reagan was first inaugurated in January, 1981, while his second and final term ended in January, 1989, when George H.W. Bush was sworn in.)
As can be seen in the table below, the S&P 500-stock index proved to be an also-ran during a period in which the bond market thrived. Just look at the performance of intermediate-term government bonds: Yields (5-year maturities) fell from a January, 1981, rate of 12.75% to a December, 1988, rate of 9.17%. (Five-year yields reached a high of 16.36% in August, 1981, and a low of 6.68% in August, 1986, as the Federal Reserve endeavored to snuff out inflation.)
On the bright side, all categories outpaced inflation during this eight-year period, which wasn't the case during the '70s, when long-term corporate bonds were the only investments to outpace the compound annual growth rate for inflation.
Compounded Annual Growth Rate (% Return)
Term 1: 1981-84 Term 2: 1985-88 Full Yrs.: 1981-88
Long-Term Corp. Bonds 15.0 14.5 14.8
S&P 500 10.7 17.8 14.2
Long-Term Govt. Bonds 13.5 14.9 14.2
Small-Cap Stocks 17.4 10.4 13.8
Int.-Term Govt. Bonds 14.7 10.9 12.8
Treasury Bills 11.0 6.4 8.7
Inflation 5.1 3.4 4.3
Source: Ibbotson Associates
JUST A BLUFF? From an industry standpoint, the table below shows the 10 best- and 10 worst-performing groups within the S&P 500. At first glance, one should note the conspicuous absence of a quintessential "Reaganesque" sector -- Aerospace/Defense. The Gipper's eight years in office saw a heavy defense buildup on both sides of the Iron Curtain -- in the U.S., to create the mythical Star Wars satellite-based defense shield and in Russia to keep pace with it. But America's military spending didn't result in a spectacular performance for the S&P 500's Aerospace/Defense sector.
Indeed, the group posted a cumulative price gain (excluding dividends) of 60%. That's well below the 105% posted by the S&P 500 (which returned nearly 190% during the period, if you include dividends). This overall performance places it among the weaker industries, rather than the stronger ones, which appears to provide support to those who have contended that the Star Wars initiative was only a bluff.
Cumulative % Changes, w/o Divs.10 BEST Term 1: 1981-84 Term 2: 1985-88 Full Yrs.: 1981-88
Broadcasting (TV, Radio & Cable) 117 221 596
Foods 126 183 540
Retail (Food Chains) 100 190 480
Beverages (Alcoholic) 120 153 457
Retail (Department Stores) 150 120 452
Containers (Metal & Glass) 101 169 440
Containers & Packaging (Paper) 94 147 378
77 162 365
Waste Management 29 250 350
Beverages (Non-Alcoholic) 92 131 343
Communications Equipment 58 -15 35
Electronics (Semiconductors) 28 1 29
Natural Gas -8 35 24
Oil (Domestic Integrated) -17 35 12
Machinery (Diversified) -34 68 11
Iron & Steel -28 46 5
Banks (Major Regionals) -15 11 -5
Gold & Precious Metals Mining
-35 41 -8
Homebuilding -14 1 -13
Oil & Gas (Drilling & Equipment) -60 -4 -61
The concentration of consumer-related industries in this top 10 list -- food, beverage, tobacco, and the containers in which they're packaged -- brings to mind the ascendancy of the baby boomers during the decade and their spending habits as they began to enter their peak earnings period.
FINAL RESPECTS. The weaker performers, such as the energy and materials industries, appear to us at S&P to be those that shouldn't have been expected to benefit from a reining-in of inflation, as the annual rate dropped from 8.9% in 1981 to 4.4% in 1988. In addition, it can be seen that selected tech stocks would have to wait until the 1990s before they had their day in the sun.
Of course, the Reagan years were unique, and no forecast for the 2000s should be inferred from this analysis. We just wanted to take a quick look back at the sector and benchmark performances during the early years of that great 1982-2000 bull market as we pay our final respects to the Great Communicator.
Industry Momentum List Update
For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of June 10, 2004.
S&P STARS* Rank
Casinos & Gaming/Consumer Discretionary
Catalog Retail/Consumer Discretionary
Insight Enterprises (NSIT)
Communications Equip./Info. Tech.
Cisco Systems (CSCO)
Consumer Electronics/Consumer Discretionary
Harman International (HAR)
Diversified Metals & Mining/Materials
Peabody Energy (BTU)
Fertilizers & Ag. Chem./Materials
Internet Retail/Consumer Discretionary
Internet Software & Services/Info. Tech.
Oil & Gas Refining/Mktg./Energy
Technology Distributors/Info. Tech.
Wireless Telecom Svcs./Telecom Svcs.
Nextel Communications (NXTL)
* S&P's stock appreciation ranking system for the coming 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is chief investment strategist for Standard & Poor's