ROGER E. BRINNER and STEPHEN H. BROOKS
BUSINESSMEN, economists, and finance specialists have frequently stated that the crises of the 1970s have "depressed" the stock market. The regularly cited crises include the 1975 recession, increased regulatory burdens, the discovery that OPEC can hobble the industrial world, and accelerating inflation from a host of causes. Of these causes the link between inflation and the stock market is the greatest subject of debate. At the end of the 1960s stocks were widely assumed to be attractive investments in an inflationary environment because they are based on real assets. The assumptions were wrong. The past decade of rising inflation has been a period of weak equity demand. Figure 1 displays the surprisingly strong negative correlation between inflation and the growth in real equity prices.1. After adjustment for inflation, the stock market fell sharply in the 1970s even though real earnings were stable. An important issue is whether investors as a group correctly assessed the impact of inflation on corporate prospects or whether they reacted in a grossly exaggerated, negative manner.
Certain observers have also argued that the tax reforms and generally rising tax rates of the last decade were major contributors to the decline in____________________