By now it should be apparent the stock market inhabits a different world than the one the rest of us live in. Amid the most severe social unrest in decades and a historic pandemic, the Nasdaq Composite sits just a few percent below its record high.
Yet there is ample precedent for this disconnect in the events of 1968, one of the most tumultuous years of the past century and indeed the nation’s history. Despite assassinations, cities in flames, student sit-ins, and political demonstrations, the stock market moved steadily higher.
“How can stocks rally in the face of riots?” asked Julian Brigden, co-founder of Macro Intelligence 2 Partners, in a tweet Monday. After the assassination of Martin Luther King in April 1968, “there were riots in 125 U.S. cities with 82nd Airborne on the streets of DC. [The S&P 500 ] gained 16%. Tragic but true!”
Dr. King’s murder was the worst of the terrible events of that year, which remains a vivid memory for me, not something I learned from history. After the assassination of Robert F. Kennedy a few weeks later, I feared society was becoming unhinged.
Urban riots were regular summer occurrences, beginning in Harlem in 1964. Opposition to the Vietnam War steadily increased and became less peaceful. In 1968, there was a general strike in France, violent clashes at the Democratic convention in Chicago, and Soviet tanks rolling into Czechoslovakia. As a high school student, I didn’t notice the stock market’s advance amid the tumult.
What I also didn’t realize at the time was the U.S. economy was in the midst of one of the most robust expansions in history, spurred by the “guns and butter” fiscal policies of Great Society programs and Vietnam War spending. To curb the deficit, Congress passed a 10% surtax on higher incomes in mid-1968, which did little to slow consumer spending. The unemployment rate fell to 3.6%, with personal income growing at a 9.8% annual rate in the first half of 1968. Production was constrained by capacity bottlenecks and labor strikes, according to a St. Louis Federal Reserve report from that year.
While interest rates crept higher, the central bank accommodated the surging demand for credit, expanding its balance sheet at a nearly 10% annual rate. The broadly defined money supply expanded at a 9.7% annual rate. With ample liquidity being fed to a strong economy, stocks rose despite the social unrest.
By contrast, we now are in the midst of what’s almost certainly the most severe economic contraction ever experienced in the U.S. due to the mass shutdowns to contain the coronavirus. The May unemployment rate may hit 20% when it’s reported Friday, after 40 million Americans filed for jobless benefits in the past two months.
But the economic crisis also has been met by unprecedented Fed actions to expand financial-market liquidity, plus more than $3 trillion in fiscal policy actions to try to fill the hole left by the economic effects of Covid-19. That was on top of a federal deficit already running at a $1 trillion annual rate.
As a result, by Tuesday’s close the S&P 500 was up 37.7% from its March 23 low close and off just 9% from its Feb. 19 peak. The technology-led Nasdaq Composite was up 40% from its March lows and off just 2% from its February high. In dollar terms, the Wilshire 5000, the broadest measure of the U.S. stock market, has increased by $9.3 trillion from the lows, while the Fed’s balance sheet has increased by $2.8 trillion, to over $7 trillion, in that time frame.
It seems the simple expansion of liquidity via expansionary fiscal and monetary policies can lift stock prices on Wall Street even while chaos reigns on the streets of America’s cities. The contrast of those dueling realities has rarely been so stark.
There is another, less-recognized aspect of these policies in the foreign-exchange market. In 1968, the surfeit of dollars resulting from the U.S. guns-and-butter fiscal policies underwritten by the Fed caused the first cracks in the Bretton Woods system of fixed exchange rates. That would effectively end when President Richard Nixon ended the dollar’s convertibility into gold at $35 an ounce, causing great consternation at the time.
Similarly, the U.S. Dollar Index is down almost 5% from its peak in March a few days before the stock market’s recent low. To a world heavily indebted in dollars, a cheaper greenback is welcome. So, too, for U.S. exporters, which would benefit from a more competitive dollar.
The other lesson from 1968 is what happened after that. Inflation and interest rates jumped in 1969, and the stock market was down over 30% by midyear from its late 1968 peak as the Fed tightened sharply. The economy suffered a brief recession from December 1969 to November 1970, with unemployment rising to a benign 5.5%.
Optimists think the economy has hit bottom and should experience a fairly vigorous recovery as states reopen and the effects of the monetary and fiscal stimuli are felt. That assumes Covid-19 is waning, which may be tested if the street demonstrations result in a new spike in infections. The dual challenges of social unrest and coronavirus are even more than what 1968 faced.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
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June 03, 2020 at 05:00PM
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What Happened in 1968 Can Show Us Why the Market Is Rising Now - Barron's
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