Here’s the S&P 500’s chart from 1986-1987.
November 1985 – March 1986
In the 1980s, the U.S. economy’s fastest growth ended in 1985 and slowly went downhill from 1986 – 1990. That is similar to the current economic expansion. U.S. economic growth peaked in 2013/2014, and economic growth has been grinding lower very slowly.
Oil prices crashed from November 1986 – March 1987. This was very similar to oil’s crash from mid-2015 to early-2016. Back then, the Saudis started a price war to boost their market share in oil production.
During oil’s crash, the S&P 500 actually went up. This is similar to the August 2014 – March 2015 period, when oil crashed but the S&P went up in a wide range.
The crash in oil slowed U.S. economic growth, but caused no recession. This is just like 2015-2016. U.S. economic growth slowed down, there was an earnings recession (the energy sector’s profits turned into massive losses), but the U.S. economy did not enter into a recession.
Some areas of the U.S. (i.e. oil producing states) saw negative economic growth. But the U.S. as a whole was ok.
- Investment in the energy sector tanked.
- Jobs growth tanked. The energy sector alone cut 150k jobs in 1986.
Why the U.S. stock market soared from October 1986 – August 1987
2 factors gave the U.S. economy a shot in the arm, which temporarily delayed the U.S. economy’s slow decline.
- Consumer spending soared as consumer debt soared (thanks to Reagan’s deregulation of credit cards).
- Reagan overhauled the U.S. tax code in 1986.
From the Great Depression to the 1985, U.S. consumers were high savers. An entire generation of Americans who grew up in the aftermath of the Depression knew the importance of saving. Reagan kicked off a great surge in debt that completely changed the average American from being a high saver to a high borrower.
Reagan accomplished this by deregulating financial regulation, which opened up access to new forms of borrowing such as credit cards.
Under Reagan, Congress passed a massive tax overhaul on October 22, 1986. Since then, no other tax overhaul of its magnitude has been successful in the U.S.. Reagan slashed taxes across-the-board in a way that no other President after him has done.
This ignited “animal spirits” in business sentiment and the stock market.
These 2 factors caused the stock market to soar from late-1986 to mid-1987.