On this date 32 years ago, the New York Times included the following paragraph in an article titled, “Dark Days On Wall Street.”
In the past two weeks, all the market averages have plunged to new lows as Wall Street, beset by cruel economic news from all sides, has time after time been unable to mount a sustained rally. That is a discouraging omen, an indication that the bottom has not been reached, many securities analysts say, and a sign that even the most steel-willed optimists may be about to throw in their towels.
As is their habit, the news media and many investors tend to focus on what has already occurred. In this case, there seemed to be many reasons for pessimism: Collapsing stock prices, down almost 25 percent from 1981’s peak; a second recession in two years; rampant inflation; and erosion of corporate profits. In the political arena. Weaker earnings were leading to dividend cuts. Banks were experiencing loan write-offs, and cutting off tight credit. In the political arena, President Ronald Reagan was forsaking his tax cuts in favor of increases to tame soaring deficits.
It might not have occurred to readers that this information was already reflected in stock prices. Indeed, inflation, courtesy of Federal Reserve Chairman Paul Volcker, was about to take a two-decade-long tumble. Yields on three-month Treasury bills were falling from 12.5 percent to 9.35 percent. The price-earnings ratio on the Dow Jones Industrial Average was a mere 6.5. The Standard & Poor’s 400 industrials — does this index even exist anymore? — was only 7. The S&P 500 Index was trading at book value, while the Dow was below book. Stock prices were just about at their lows.