Unexpectedly Intriguing!
26 February 2009

Originally, instead of venturing into how inflation expectations appear to affect stock prices, we were just going to give a rundown of the significant milestones we observed in our chart showing the relationship between stock prices and trailing year dividends per share during the years from 1976 into 1981. So, for the sake of filling in our historical record, that's what we'll do today!

Here's that chart again:

S&P 500 Average Monthly Index Value vs Trailing Year Dividends per Share, February 1976 through September 1981

Now for the significance of the indicated dates, for which we found the Timelines of History for the years in question to be especially valuable, along with the BLS' inflation data and the monthly stock market data for the S&P 500 that we've previously documented:

Date Event
January 1976 The last month of the preceding period of disorder in the stock market. Our next backward step through history will consider this period.
February 1976 Dividends per share for the S&P 500 resumes positive growth, slowly at first, then faster as the U.S. economy more fully recovered from the recession that officially ended in March 1975 and especially as the rate of inflation in the U.S. decelerated from 6.7% in January 1976 to 5.0% in December 1976.
July 1976 The S&P 500 peaks for the year with an average value of 104.44 for July 1976. Jimmy Carter becomes the Democratic Party's presidential nominee. In August 1976, weakened incumbent President Gerald Ford narrowly wins over Ronald Reagan for the Republican nomination.
January 1977 Jimmy Carter is sworn in as the 39th President of the United States. The S&P 500 marks its high point for the year with an average 103.80 for the month of January, as the new administration institutes highly inflationary monetary and big spending fiscal policies. The annual rate of inflation booms upward from 5.2% in January 1977 to 7.0% in April 1977 before ranging between 6.2% and 6.8% for the next year.
July 1977 Public perceptions of increasing social disorder in the U.S. are increased as a 25-hour power blackout affecting 9 million residents of New York City's metropolitan area, as looters rampaged in the city after lightning in upstate New York incapacitated the power grid. President Carter amplified those perceptions by equating criminal looting with the nation's unemployment situation on 22 July 1977. Stock values began a long downward march from the average level of 101.20 achieved in the month, even as dividends per share grow.
March 1978 to April 1980 The S&P 500 bottoms out at 88.82. Inflation begins skyrocketing upward, beginning at 6.4% in March 1978 and peaking at 14.6% in April 1980. The gains in stock prices are largely an illusion, as they're being buoyed up by the effects of hyperinflation during this period. Here, an investment in the S&P 500 launched in March 1978 and terminated in April 1980 would, instead of growing at an annualized rate of 7.37% in nominal terms, really represent a loss of 4.54% when adjusting for the effects of those elevated levels of inflation.

August 1978 The S&P 500 briefly peaks for two months with an average value of 103.90.

February-March 1980 Stock prices plummet more than two standard deviations, which we've found to be an early indication that the order that we have identifed in the stock market is breaking down. This event occurred as the 1979 energy crisis neared its peak as the price of a barrel of crude oil rose to $39.50 (in 1980 US Dollars), its all-time highest level in inflation-adjusted terms until 7 March 2008.
April 1980 - November 1980 The last downtick before a period of disorder in the market began. Here, as inflation peaked, it began to subside as the Federal Reserve under Paul Volcker implements much tighter controls on the U.S. money supply, with the bank prime lending rate reaching a level of 20% and demonstrating a willingness to hold it there, finally establishing the Federal Reserve's credibility in the eyes of investors that it was truly committed to subduing runaway inflation. Stock prices begin a rapid rise, going from 103.00 to 135.00 by November 1980.
August 1981-September 1981 Stock prices dive as a major recession begins to take hold in the U.S. economy, as the Federal Reserve's continuing effort to decisively bring inflation under control has costs. Stock prices range within a narrow band between 109 and 123 until August 1982 when a new long-running bull market began.

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