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Market Analysts Need
to Redefine "Normal"
by

This first appeared in the
North Hills News Record

Bull and Bear Market

With the stock market suffering another round of roller coaster jolts, financial soothsayers are predicting it will make a drastic plunge and finally return to "normal."

They've been saying that for years.

In the past, the stock market has earned investors about a 7 percent return. Recent years, however, have seen steady returns in the double-digits.

So has the market been irrational or will normal finally have to be redefined?

Analysts often talk as if the market follows some mysterious biorhythm of its own. But stock market performance has nothing to do with cryptic cycles, sunspots or who wins the Super bowl.

Using input from millions of investors, the stock market is an excellent barometer of the economic environment. Businesses behave predictably. Their goal is to make profit. The wild card factor in predicting stock market performance has always been the political environment.

During the decade of the 1970's, the stock market suffered because of lousy public policy. Inflation was up, unemployment was up, taxes were up and the welfare system was expanding. Busy-body bureaucrats also dreamed up new ball-and-chain regulatory departments like the Environmental Protection Agency to inflict costs on business. The result was a slumping stock market.

The Dow Jones Industrial Average
beginning of each year
Year	DJIA	Year	DJIA
1970	809	1986	1538
1971	826	1987	1927
1972	889	1988	2015
1973	1047	1989	2144
1974	858	1990	2810
1975	632	1991	2611
1976	858	1992	3172
1977	999	1993	3209
1978	817	1994	3757
1979	811	1995	3838
1980	973	1996	5177
1981	883	1997	6442
1982	1027	1998	7965
1983	1027
1984	1253
1985	1190

There was lots of good news for the stock market in the 1980's. Many regulations were cut, inflation was kept in line and the tax code was not only simplified but taxes were cut too.

The end of the Cold War opened up new markets. Capital flowed more efficiently both domestically and internationally forcing more discipline onto management and we had a healthy stock market for most of that period.

The one glaring exception was October of 1987 when investors thought good policy was coming unglued.

Sunday, October 4, Alan Greenspan, then a newly appointed chairman of the Federal Reserve, appeared on television. He was trying to hose down speculation that interest rates were about to rise. That announcement combined with various other factors, pushed the market into a free-fall.

That week the stock market crashed. Policy makers wised-up and Alan Greenspan prudently decided not to make television appearances any more.

This decade has behaved no differently. The market dropped when the Clinton crew toyed with the idea of socializing our health care system. When the policy makers abandoned the idea, the market recovered.

And for all the trouble that President Clinton's skirt-chasing has caused, it's kept him so busy he hasn't had time to implement stupid policies that might damage the business climate.

Some people whine that public officials have become too concerned about market performance and not concerned enough with "leading the people." Those of us who believe that governments that govern best, govern least are quite content to let the market impose its discipline.

Stock markets do nothing but evaluate the future. If you are an optimist today, you believe stocks are undervalued. If you are a pessimist, they are overvalued.

If politicians are forced to create a healthy economic climate, there is no reason not to be optimistic and create a new definition for normal market returns.