Decades of falling interest rates didn’t just help property owners.
Forty years ago this month, the Federal Reserve’s bold move to shed the nation’s inflation problem with sky-high interest rates hit its pinnacle. One measure of the market gyrations of the period — average 30-year mortgage rates — peaked at 18.5% on Oct. 16, 1981. Who knew what was next for loans, or the entire economy?
Wall Street’s venerable Dow Jones stock index gyrated that week to 856. (Yes, the very same index closed at 35,300 on Friday.) Stirring trader emotions were comments by influential economist Henry “Dr. Doom” Kaufman who said rates could further spike. At the same time, the American Bankers Association president speculated the prime interest rate — once an important borrowing benchmark — could fall from 18% to 14% by year’s end.
Fortunately, a long-running rate decline followed and that cheaper money helped more than real estate owners get rich. Though, I’ll note the price of a typical California home, for example, would soar 546% over the next 40 years.
Other investments flourished, too, thanks to a healthier economy, not to mention technological and geopolitical events that, for the most part, improved business and day-to-day life.
So, if somehow you had the nerve to invest in the stock market in autumn of 1981 — with a shaky economy, global tensions, a new president (Ronald Reagan) and those sky-high rates — you were richly rewarded.
Thanks to data provided by investment tracker Charles Rother of Sector Logic in Costa Mesa, we can more clearly see the size of the interest-rate bounty.
Let’s ponder an investor who put $1,000 into the widely watched Standard & Poor’s 500 index in early October 1981. That investment has since ballooned to $101,387 as of Sept. 30, 2021, with its price gains and dividends reinvested. That’s a remarkable average yearly gain of 12.2% over four decades.
Taming inflation also helped investors restore the buying power of their winnings. The Consumer Price Index averaged 8.6% annual increases between 1971-81. The S&P 500’s 6.3% annual average upswing in those years couldn’t keep pace with the overheated cost of living.
So gains on anything since 1981 look even better when you note that inflation averaged only 2.7% annually over the past 40 years.
Now let’s look at that performance of one real estate yardstick. Investing in commercial real estate through publicly owned property trusts turned $1,000 into $87,648, by one index — an 11.8% yearly gain. That’s slightly better than what was seen as a golden age for property: 10.9% annual gains in 1971-81.
Let’s see how other stock investments fared …
Small-company stocks: $1,000 invested in October 1981 grew to $94,502 in 40 years. That’s 12% average yearly growth. In 1971-81, shares in this niche jumped at a 16.5% annual pace.
Technology stocks: The volatile Nasdaq index turned $1,000 into $80,256 — or 11.6% yearly gain, even after the dot-com bubble burst. Tech shares averaged 5.1% gains in 1971-81.
Many fixed-income investors did well, especially those who could take some risks. Falling inflation since 1981 has given bondholders both steady interest, plus appreciation. Bond prices rise as rates fall. But has that bet run its course?
Long-term corporate bonds: $1,000 became $44,310 — 9.9% yearly average vs. 2.4% in 1971-81.
Long-term government bonds: Owners of 20-year Treasuries saw $1,000 become $38,930 — 9.6% yearly vs. 1.6% in 1971-81.
One-month T-bills: This is a measure of what the “no-risk takers” got. Their $1,000 grew to just $4,257 or 3.7% yearly. It’s amazing to think that T-bills got owners 7.6% a year back in 1971-81. Yes, banks once paid depositors decently.
We can’t end without discussing gold. Ah, the old inflation hedge … allegedly!
The metal turned $1,000 into $4,065 in 40 years, or 3.57% yearly, barely besting the CPI. That’s quite the change from inflation-scarred 1971-81 when gold gained an average 26% per year.
Jonathan Lansner is business columnist for the Southern California News Group. He can be reached at jlansner@scng.com
