The Bears Are Wrong About the Economy

Don't sweat all the talk of gloom and doom; history proves that, in the long run, it doesn't pay to be a pessimist.

In August 1979, Business Week magazine ran a cover story entitled "The Death of Equities," in which it declared that inflation had permanently crippled stocks as an investment. "For better or for worse," Business Week asserted, the U.S. "probably has to regard the death of equities as a near-permanent condition -- reversible some day, but not soon."

Yet just two months later, Paul Volcker, newly appointed chairman of the Federal Reserve, put the screws on inflation by sharply raising short-term interest rates and cutting back on growth of the money supply. The economy suffered two recessions in the next three years, but stocks held their value. In the summer of 1982, stocks kicked off the greatest bull market the world has ever seen. During the next 18 years, Standard & Poor's 500-stock index rose nearly 15-fold, or 19.9% per year, creating trillions of dollars in wealth for investors who owned stocks.

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Jeremy J. Siegel
Contributing Columnist, Kiplinger's Personal Finance
Siegel is a professor at the University of Pennsylvania's Wharton School and the author of "Stocks For The Long Run" and "The Future For Investors."