Intermarket Analysis: Profiting from Global Market Relationships

CHAPTER 1

A Review of the 1980s

To fully understand the dramatic turns in the financial markets that started in 1980, it’s necessary to know something about the 1970s. That decade witnessed a virtual explosion in commodity markets, which led to spiraling inflation and rising interest rates. From 1971 to 1980, the Commodity Research Bureau (CRB) Index—which is a basket of commodity prices—appreciated in value by 250 percent. Bond yields rose by 150 percent during the same period and, as a result, bond prices declined. Figure 1.1 shows the close correlation between the CRB Index and the yield on 10-year Treasuries between 1973 and 1987. Long-term rates rose with commodities during the inflationary 1970s and fell with them during the disinflationary 1980s.

The 1970s were not good for stocks, either. The Dow Jones Industrial Average started the decade near 1,000 and ended the decade at about the same level. In the middle of that 10-year period of stock market stagnation, the Dow lost almost half its value. The 1970s were a decade for tangible assets; paper assets were out of favor. By the end of the decade, gold prices had soared to over $700 per ounce. A weak dollar during that period also contributed to the upward spiral in gold and other commodity prices—as well as the relative weakness in bonds and stocks. All this started to change in 1980, when the bubble burst in the commodity markets. Figure 1.2 is a ratio of the Dow Industrials divided by the gold market. The plunge in this ...