Just as the underperforming stock groups reflected the new regime, so did the overperforming ones, which in just a few years went from being only 40% of the size of the oil, capital goods, and commodities industries in the S&P 500 to being their equal. Twenty of the thirty overperforming industries were in consumer nondurables or services, versus only one among the average and underperforming industries, and seventeen of the thirty changed their trend from previous average or underperformance. This reflected the positive impact of lower income taxes, higher consumer confidence, and the lack of serious impact from the strong dollar. The retailing stocks were particularly sensitive to the improvement in consumer confidence, and all of the industries were insensitive to imports. Imports only rose from 3 to 4% of domestic production in the overperforming indusries, versus 22-25% for the average and underperforming industries.
The most prominent overperforming sector was the media industries which benefited from an increase in advertising 70% greater than GNP, the end of advertising limits in radio and television, technological developments in computerization and cable television, and antitrust freedoms to add radio and television stations, consolidate competing newspaper operations in the same city, and merge cable operations. Radio and television acquisitions quadrupled from 461 in 1980 to 1,875 in 1985, and the broadcasting, publishing, and newspaper industries became highly overlapping.
The other secularly overperforming industries were the Food industry, which benefited from reduced inflation and a huge increase in new diet- oriented and microwave products, specialty retailers, industries stimulated by government actions such as the Aerospace, Pollution Control, and Hospital Management industries, and a few technologically oriented capital goods producers. Small capitalization stocks continued to overperform, but their character was greatly changed by the record volume of IPOs for high technology computer and biotechnology companies, which proved to be short on earnings and high on volatility. Most of the other overperforming industries, particularly those in transportation or related to the auto and capital goods industries only enjoyed cyclical recoveries. Railroads were unique among the transportation industries, in truly benefiting from deregulation as they got to negotiate freight rates on 50% of their volume and to cut employees by 30%. The airlines, by contrast, were plagued with price cutting from startup discount carriers such as People Express and New York Air, as were the truckload truckers.
The division of American industry into under- and overperforming stock groups had a parallel in the separation of the corporate bond market into declining and improving credits; but before turning to it I will first look at the treasury market to establish the great influence of the Federal Reserve and the administration on interest rates and to show how they supercharged the mortgage securities market into new prominence.