Any Happy Returns

Chapter 61982–2000: The Modern Cycle

Mr Gorbachev, open this gate! Mr Gorbachev, tear down this wall!

—Ronald Reagan

The secular bull market from 1982 to 2000 was, overall, a period of significant returns and low volatility in financial markets (Exhibit 6.1). That said, as with most secular bull markets, it included several cycles. Much like the 1968–1982 era, there were two recessions in most economies (the recessions of the early 1980s and 1990s were both deep and painful). However, unlike the ‘Fat and Flat’ trend of the 1970s period, the recessions of the 1980s were accompanied by a downward trend in inflation and interest rates that enabled markets to generate strong returns.

Over the whole super cycle, US equity generated over 1,300% total real returns, annualising at 16%, including dividends and after inflation. Dividend growth compensated for inflation (Exhibit 6.1).

Many complex factors drove the higher returns, including:

1. The Great Moderation
2. Disinflation and a lower cost of capital

   

   Exhibit 6.1 The secular bull market from 1982 to 2000 was a period of significant returns and low volatility in financial markets

   NOTE: Shiller price/earnings (P/E) is a valuation measure. It is calculated by dividing the index price level by the average inflation‐adjusted 10‐year earnings per share (EPS).

   SOURCE: Goldman Sachs Global Investment Research

3. Supply‐side reforms (including ...