Review of the Old Normal

This chapter reviews the old normal intermarket relationships that existed during the last three decades of the 20th century. A peak in commodity prices during 1980 ended the hyperinflationary 1970s and led to two decades of disinflation and bull markets in bonds and stocks. It will also show how the 1987 market crash reinforced intermarket trends, as did the first Iraq war at the start of 1991 and the second war 13 years later. Intermarket relationships held firm during the stealth bear market in stocks that took place during 1994. The Asian currency crisis during 1997–1998 introduced the threat of deflation for the first time since the 1930s and changed some key intermarket relationships. The collapse of the Japanese stock market in 1990, and resulting deflation in that country, also contributed to the growing deflation threat as the new century started.

1980 Was a Key Turning Point

The year 1980 is important in the history of intermarket relationships. The commodity bubble burst that year and ended the hyperinflation of the 1970s when hard assets like commodities soared and paper assets like bonds and stocks floundered. The 1980 peak in commodity prices (which coincided with a bottom in the U.S. dollar) began a two-decade disinflationary trend and launched major bull markets in bonds and stocks. The combination of a rising dollar and falling commodities during 1980 contributed to a major upturn in bond prices during 1981. The stock market ...

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