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The 1949–1966 Postwar Golden Age
Seventeen years. Four cyclical bulls, three cyclical bears. The index quintupled. Real returns of fourteen percent a year.
By June 1949 the Depression that had opened the century was finally over, and the war that had followed it was five years into memory. The United States was the only major industrial economy still standing, half of the world’s manufacturing happened within American borders. Sixteen million demobilized servicemen were being absorbed into universities, trade schools, and VA-backed mortgages. Suburbs that would house a generation were being planned on former potato fields. The population would grow from 149 million to 196 million before this bull was over.
What follows is the longest and strongest secular bull market in American history. The S&P 500 ran from 13.55 in June 1949 to 92.43 in December 1965, a quintupling in sixteen and a half years, plus dividends. Real returns averaged fourteen percent a year. Three generations of American wealth were set in motion. Suburbia reached from Levittown to San Jose. The Interstate Highway System was built. Polio was defeated. Satellites were launched. Civil rights were signed into law. And an entire middle class, children of the Depression, built the wealth their parents had not been able to build.
The ruler. S&P 500 daily closes throughout, same measurement discipline as the 1929-1949 bear. The Dow Jones Industrial Average famously tried eleven times to cross 1,000 between 1966 and 1972 before succeeding; our chart tracks the broader five-hundred-company index that had already made the same move years earlier.
Numbered bands mark each cyclical phase; the sections below walk them in order. On measurement: we use the S&P 500 throughout this series rather than the Dow Jones Industrial Average. The S&P samples five hundred companies against the Dow’s thirty; it is the only common ruler that spans every secular era from 1929 to today.
1
▲ CYCLICAL BULL
Postwar Expansion
The men who came home.
By June 1949 the United States was the only major industrial economy still standing. Europe was rubble, Japan was occupied, the Soviet Union had absorbed Eastern Europe but needed decades to rebuild its own interior. Half of the world’s manufacturing happened within American borders. Sixteen million demobilized servicemen were being absorbed into the labor force by the G.I. Bill, 2.2 million into college, 5.6 million into trade schools, 2.4 million into VA-backed mortgages that carried down payments as low as nothing. In Nassau County, Long Island, William Levitt built four-bedroom houses for seven thousand dollars at a rate that peaked at thirty houses a day; waiting lists ran 1,500 names long.
On June 25, 1950, North Korean troops crossed the 38th parallel. The United States was at war again within five years of V-J Day. Defense spending, which had fallen to nine percent of GDP by 1948, climbed back to fifteen percent by 1953 as the Truman administration rearmed for a conflict it initially expected to last six weeks. The war dragged on three years, killed thirty-six thousand Americans, and permanently rewired the US economy around a standing military-industrial base that had not existed before 1950. Meanwhile the Federal Reserve, which had spent the war pegging bond yields to help the Treasury finance the fighting, was arguing with the Treasury for the right to let interest rates move again. The March 1951 Fed-Treasury Accord granted that independence, the single most consequential monetary policy decision between 1933 and 1979.
The market understood what the combination meant: fiscal expansion from the war, a free Fed to manage the economy, suburbs filling with new families, television sets reaching sixty-five percent of American homes by 1955. Industrial output grew five percent a year. The S&P 500 ran from 13.55 in June 1949 to 26.66 by January 1953, nearly doubling in three and a half years. Eisenhower was elected in November 1952 on a pledge to end the Korean War, and the Dow Jones celebrated by crossing 290 for the first time since 1929.
Then the Fed, worried about inflation that had followed the postwar expansion, began to tighten. The expansion paused.
“Half of the world’s manufacturing happened within American borders.”
2
▼ CYCLICAL BEAR
The Korean War Pause
An eight-month breather at the end of a war.
Dwight Eisenhower took the oath on January 20, 1953, as the first Republican president in twenty years. His cabinet included nine millionaires and a plumber, a joke that persisted through two terms. He was a professional soldier who had commanded the largest coalition army in history, and he distrusted both the generals who had served under him and the economists who now wanted to run the economy. His first priority was ending the war Truman had started.
On March 5, 1953, Joseph Stalin died in his dacha outside Moscow, foam at his mouth, having been found on the floor of his bedroom. His death removed the single most intransigent obstacle to a Korean armistice. Negotiations that had stalled for eighteen months at Panmunjom resumed within weeks. On July 27, 1953, the armistice was signed. The Korean War did not formally end, it has not formally ended as of today, but the shooting stopped. Defense spending, which had been budgeted to continue growing, was cut by thirty percent over the next two years.
The National Bureau of Economic Research would later date the recession from July 1953 to May 1954, mild by historical standards but real. GDP contracted 2.5 percent peak-to-trough. The Federal Reserve, which had been raising rates to cool wartime inflation, began cutting in May 1953. The S&P 500 lost about fifteen percent through September, from 26.66 to 22.71, then began to turn. The Fed-Treasury Accord was two years old. For the first time in a generation, the central bank was actively managing the business cycle rather than financing a government priority.
What followed was the longest uninterrupted peacetime expansion the United States had ever seen.
“The economy, which had absorbed the fiscal expansion, now absorbed the contraction.”
3
▲ CYCLICAL BULL
The Eisenhower Expansion
Highway Act, polio vaccine, Elvis, Suez.
On May 17, 1954, the Supreme Court ruled unanimously in Brown v. Board of Education that separate educational facilities were inherently unequal. The decision overturned Plessy v. Ferguson, which had stood for fifty-eight years. Across the South, white resistance organized immediately; across the North, the reaction was mostly denial that segregation was a Northern problem. On April 12, 1955, Jonas Salk announced that his polio vaccine was safe and effective, a disease that had crippled fifty-eight thousand American children in the summer of 1952 alone would be nearly eliminated by 1962. On December 1, 1955, Rosa Parks refused to give up her seat on a Montgomery city bus.
On June 29, 1956, Eisenhower signed the Federal-Aid Highway Act, twenty-six billion dollars over thirteen years for 41,000 miles of interstate highway, the largest public-works project in American history. Eisenhower had been impressed in his youth by a 1919 Army convoy that took sixty-two days to cross the country, and in 1945 by the German autobahn. The highway system he signed into law would permanently redraw American geography: suburbs would reach farther, trucking would displace railroads, downtowns would hollow out as commuters moved outward. General Motors, which had spent the previous decade killing streetcar systems in forty-five American cities through its subsidiary National City Lines, was positioned to profit from the automotive age it had helped engineer.
The S&P 500 ran from 22.71 to 49.64, a 118 percent gain in three years. Industrial production grew at six percent annualized. Full employment, a term that in 1949 had meant “under five percent unemployment,” now sat below four percent. On July 26, 1956, Egyptian president Gamal Abdel Nasser nationalized the Suez Canal, triggering a sequence that would end the European colonial era and briefly rupture the Western alliance. The market peaked a week later, on August 2, 1956, at 49.64.
The next thirteen months were the first serious test of the postwar economic order.
“The highway system he signed into law would permanently redraw American geography.”
4
▼ CYCLICAL BEAR
The Suez-Sputnik Correction
Fourteen months. Minus twenty-two percent.
On October 29, 1956, Israel invaded the Sinai Peninsula in coordination with Britain and France, who wanted to retake the Suez Canal from Nasser. The United States, under Eisenhower, refused to support them, the first time since 1945 that American policy had actively opposed its two most important allies. On November 4, 1956, Soviet tanks rolled into Budapest to crush the Hungarian uprising, killing twenty-five hundred Hungarians while the West watched. Eisenhower, who had broadcast promises of “liberation” to captive nations throughout his 1952 campaign, declined to act. Two Cold War lessons were absorbed in two weeks: Washington could not count on London and Paris, and the Hungarians could not count on Washington.
At 10:28 PM Moscow time on October 4, 1957, a 184-pound polished steel sphere was launched into orbit by a Soviet R-7 rocket. For the next three weeks, Americans could tune their radios to a particular frequency and hear Sputnik beep as it passed overhead. The United States, which had believed itself the undisputed technological leader of the free world, discovered that it was second in a race it had not known it was running. The National Defense Education Act followed within a year; funding for university science programs quintupled; the National Aeronautics and Space Administration was chartered on July 29, 1958.
The market absorbed the sequence badly. The S&P 500 fell from 49.64 in August 1956 to 38.98 in October 1957, a 21.5 percent decline over fourteen months, the deepest cyclical bear within the entire secular bull. The Little Rock Nine were escorted into Central High School by federal paratroopers on September 24, 1957. On October 4, Sputnik launched. On October 22, the market made its low. A week later Eisenhower appointed James Killian of MIT as the first presidential science advisor. The United States had been embarrassed into a response, and the market priced the response favorably.
What followed was fifty months of uninterrupted bull, through NASA, Kennedy, the Bay of Pigs, and the Berlin Wall.
“Americans could tune their radios to a particular frequency and hear Sputnik beep as it passed overhead.”
5
▲ CYCLICAL BULL
The Space-Race Rally
Fifty months of American technocratic optimism.
On January 31, 1958, Explorer 1 reached orbit; six months later NASA was created. On January 1, 1959, Fidel Castro rode into Havana. On August 21, 1959, Hawaii became the fiftieth state; eight months earlier Alaska had become the forty-ninth. On May 1, 1960, Francis Gary Powers was shot down over Soviet airspace in a U-2 reconnaissance plane that the Eisenhower administration had publicly denied existed, embarrassing the president at the Paris summit a week later. On November 8, 1960, John Fitzgerald Kennedy was elected the thirty-fifth president, the youngest ever elected, the first Catholic, the first born in the twentieth century, by a margin of 112,000 votes out of 68 million cast.
Kennedy inherited an Eisenhower-era CIA plan to overthrow Castro with Cuban exiles. On April 17, 1961, the invasion at the Bay of Pigs collapsed in three days, humiliating the new administration. On June 4, Kennedy met Khrushchev in Vienna and came away shaken; he told James Reston of The New York Times that it was “the worst thing in my life.” On August 13, East German troops began building the wall that would divide Berlin for the next twenty-eight years. Khrushchev’s test of the new American president was being graded in masonry.
And yet the market rallied through all of it. The S&P 500 ran from 38.98 in October 1957 to 72.64 in December 1961, an 86 percent gain across fifty months of Cold War crisis. GDP grew five percent a year. Corporate profits recovered to the point that the “nifty fifty” growth-stock era of the mid-1960s was already being pre-figured in the P/E multiples institutional investors were willing to pay for IBM, Xerox, and Polaroid. The market understood that the United States was successfully managing the Cold War, that technocratic competence was a priced asset, and that domestic policy was being driven by a young president who talked about getting the country moving again.
Then, in the first six months of 1962, Kennedy picked a fight with U.S. Steel. The market picked a fight with Kennedy.
“Khrushchev’s test of the new American president was being graded in masonry.”
6
▼ CYCLICAL BEAR
The Kennedy Flash Crash
Six months. Minus twenty-eight percent. The sharpest decline between 1946 and 1973.
On April 10, 1962, four days after the United Steelworkers signed a non-inflationary wage contract that the Kennedy administration had helped negotiate, U.S. Steel chairman Roger Blough drove to the White House and informed Kennedy that his company would be raising prices six dollars a ton. Within seventy-two hours five other major steel producers followed. Kennedy, blindsided and furious, called a press conference the next afternoon. “The American people will find it hard, as I do,” he said, “to accept a situation in which a tiny handful of steel executives whose pursuit of private power and profit exceeds their sense of public responsibility can show such utter contempt for the interests of 185 million Americans.” Within four days, under pressure that included FBI investigations, antitrust threats, and tax-audit threats, the steel companies rescinded the price increase.
The market read the sequence as Kennedy declaring war on big business. On May 28, 1962, the Dow Jones fell 5.7 percent in a single session, the worst day since October 29, 1929. The S&P 500 went into free-fall. From its December 12, 1961 high of 72.64, the index would reach 52.32 by June 26, 1962, a decline of twenty-eight percent in just over six months, the sharpest cyclical bear of the entire secular bull. There was no recession. There was no credit crisis. There was no war. There was just a sudden collective reconsideration of what a Democratic president might do to corporate profits.
The administration moved quickly to repair the relationship with business. In January 1963 Kennedy proposed the Revenue Act, which would cut the top marginal income tax rate from 91 percent to 70 percent, the first major federal tax cut since the war. The investment tax credit, enacted in 1962, offered immediate expensing of plant and equipment. Corporate America, which had assumed a Democratic president would be hostile to profits, discovered that this one wanted economic growth as his political signature. By late summer 1962 the market was already climbing again.
Then on October 14, 1962, an American U-2 photographed Soviet nuclear missile sites under construction in Cuba.
“There was no recession. There was no war. There was just a sudden collective reconsideration of what a Democratic president might do to corporate profits.”
7
▲ CYCLICAL BULL
The Great Expansion
Three and a half years that defined postwar America, and quietly ended it.
For thirteen days in October 1962, humanity came closer to nuclear war than at any other point in history. Kennedy’s handling of the Cuban Missile Crisis, public ultimatum, naval quarantine, back-channel offer to withdraw Jupiter missiles from Turkey, became the template for Cold War crisis management for the next thirty years. The market understood what had happened: not that nuclear war had been avoided, which was expected, but that the United States had faced down the Soviet Union successfully. The S&P 500 began the longest sustained advance of the entire era. Then on November 22, 1963, Kennedy was shot in Dallas. The market closed within forty-five minutes of the news, having fallen three percent. It opened on Tuesday after a Monday closure and recovered the entire loss within a week.
Lyndon Johnson, who had assumed the presidency on November 22, invoked Kennedy’s memory to push through legislation Kennedy had been unable to pass. On July 2, 1964, Johnson signed the Civil Rights Act. On August 6, 1965, he signed the Voting Rights Act. On July 30, 1965, he signed Medicare into law, and Harry Truman, who had proposed national health insurance in 1945, received the first Medicare card. The Great Society, the War on Poverty, Head Start, federal aid to education, immigration reform, passed Congress with majorities Johnson had assembled through two years of relentless deal-making with Southern Democrats and moderate Republicans. The federal government reshaped itself in eighteen months more thoroughly than it had in any period since 1933.
Then Johnson escalated the Vietnam War. The Gulf of Tonkin Resolution, passed on August 7, 1964, authorized “all necessary measures” against North Vietnam. By March 1965, Marines were landing at Da Nang. By December 1965, American troop strength in Vietnam had reached 184,000. The market peaked at 92.43 on December 31, 1965, up 76 percent from the June 1962 low, up 583 percent from the June 1949 beginning of the secular bull. The nifty-fifty era was in full flower. Inflation, which had averaged 1.3 percent through the Eisenhower years, had reached 1.9 percent in 1965 and was heading higher. The guns and butter of Vietnam and the Great Society were going to be paid for by both.
December 31, 1965. The S&P 500 at 92.43. The seventeen-year secular bull is over. The next sixteen years will take investors back to where they started.
“The federal government reshaped itself in eighteen months more thoroughly than it had in any period since 1933.”
Seventeen years. The index quintupled. Three generations of American wealth were set in motion.
The 1949-1966 secular bull was the economic consequence of winning World War II and losing the fear that followed it. Houses were built, highways paved, polio defeated, satellites launched, civil rights signed into law, and the broadest middle class in human history was constructed on the foundations of the G.I. Bill, cheap mortgages, defense procurement, and institutional confidence in American technocratic competence.
The investors who held through all of it, through the Korean War, Suez, Sputnik, the Berlin Wall, the Cuban Missile Crisis, and the Kennedy assassination, made the compounding returns that would define three generations of American wealth. The ones who panicked at every headline earned far less.
Which is the lesson. The secular current moves in generations. The cyclical weather moves in months. Reading the current is harder than reading the weather, but it is where the long money gets made.
The Stagflation Era
The seventeen-year bull didn’t end at a market top. It ended at a sentiment top. In the first week of 1966 the Dow Jones Industrial Average kissed 1,000 for the first time, then bounced off, then kissed it again. Over the next sixteen years it would try eleven more times. It would not successfully close above 1,000 until November 14, 1972, and then only for six weeks before the OPEC embargo took it back down.
What was changing beneath the headline numbers was more important: the real purchasing power of corporate profits, consumer paychecks, and investor dollars was being eaten by an inflation the Fed could not control, driven by a war the government could not win, enabled by a dollar that was no longer anchored to gold. By August 15, 1971, when Nixon took the dollar off the gold standard altogether, the postwar monetary architecture was already dead.
The sixteen years that followed earned investors negative two-and-a-half percent a year in real terms. Chapter three.
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