Part I: The Legend
VICTOR A. CANTO AND ARTHUR B. LAFFER
Theory and common experience postulate that general economic factors impact stock prices in the aggregate. These same factors can also have substantially different effects depending upon the industry group being considered. The across-the-board reduction in tax rates of the 1980s, for example, was exceptionally good for the overall stock market, sending the S&P 500 from a low of 112.8 in 1981 to a high of 336.8 in 1987. But the equities of some industry groups were benefited far more than others. Table 19.1 illustrates the variability among selected industry returns over the 1981-87 time period when the overall stock market went from trough to peak. 1
According to street lore, changes in oil prices, exchange rates, interest rates, inflation, and trade restrictions also have significantly different effects across industry lines. Few would doubt that these economic shocks have an overall impact on market aggregates. During the past decade, oil prices, exchange rates, interest rates, and inflation have covered an extraordinarily wide range of values. It would seem only natural that such a wide range of values would elicit equivalently dramatic responses from equities. In other words, in addition to an overall stock market effect, there would exist the potential, at least, for great differences in stock returns among the various industry groups as well. The grouping of equities by industry classifications is a fruitful avenue for extending in-depth analysis.
The finance literature of the past several decades has taken a different tack, however. Industry performances have been relegated to a minor role in modern