Reagan vs. Carter: Utilities vs. S&P 500

Fri, Oct 19, 2012 - 12:18am

After Reagan won his 1st term election in November of 1980 the S&P 500 hit a high on November 28 1980. The Fed funds rates fluctuated from a high of 20% to a low of 11%. As the true state of the US economy became apparent the S&P 500 fell 27% to bottom on August 8 1982.

Carter served as president from 1977-1981. After a series of widely publicized shortcomings on economic policy, foreign affairs and leadership, Carter was soundly defeated by Reagan. He inherited a recession from Nixon. Carter worked with congress and received the go ahead to attempt to reduce unemployment by both increasing government spending and cutting taxes. When inflation continued to rise unabated he changed his mind. He delayed tax cuts and vetoed his own spending programs. Interest rates continued to rise and money supply continued to shrink. The Fed was going to defeat inflation regardless of the pressure from Washington.

Iran Hostage crisis, rising fuel prices, the formation of The Department of Energy, a plea for energy conservation, “windfall profits tax” & instability in the Middle East contributed to Carter’s “Malaise speech”. The result, stagflation gripped the country. By 1979, comparing Nixon’s Watergate scandals’ low point was actually higher than Carters low point. The Camp David accords, peace between Israel & Egypt, was his greatest achievement.

Efficiency of One's Capital

With the Fed shrinking the money supply, the dollar & interest rates rising, finding an efficient place to park one’s capital was challenging at best. History can sometimes be instructive when gauging expectations for industry stock performance. Compare for example the performance of the S&P 500 and The Sothern Company (SO) (Dow Jones Utility Average total return data was difficult to find). $100,000 invested in each from 1/01/1980 to 7/01/12 produced the following results. The annualized rate or return for the S&P 500 including dividends was approximately 11.1% & approximately 16% for the Southern Company. If one had invested $100,000.00 In both and reinvested dividends the result would be as follows:

S&P 500 would be $294,000.00 & $1,221,000.00 for The Southern Company. The dividend reinvestment makes up for 94% of The Sothern Company’s total return & 41% for the S&P 500 total return. WOW! This was accomplished with lower overall risk to the S&P 500.

About the Author

Financial Advisor
rob [dot] bernard [at] financialsense [dot] com ()