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The power of optimism

America was staring at a pile of serious problems the day Ronald Reagan was inaugurated as president 23 years ago. The stock market was one of them.

Reagan will be remembered for his role in influencing huge issues and epic events, for better and worse. The revival of a moribund stock market, triggering an unprecedented era of investment prosperity that stretched more or less intact for nearly 20 years, surely ranks among them. Still, there is debate about how much Reagan influenced a recovering investing environment and to what degree he was at the right place at the right time when it came to the stock market.

First, a refresher on just how bad things were in the beginning of the 1980s. Inflation, the economic poison that had ravaged the previous decade, was still running in the double digits. Unemployment was sky-high and getting worse, peaking at 10.8 percent near the end of 1982.

The stock market had spent a decade treading water. The Dow Jones industrial average, at 800.35 when the first opening bell of the 1970s sounded, closed at 838.74 on Dec. 31, 1979. How would you feel about investing your 401(k) money in that kind of stock market?

The bond market was another depressing story. Yields on 10-year Treasury notes were historically high when Reagan took office and peaked at 15.8 percent a year and a half into his first term. That meant bond prices, which move in the opposite direction of rates, were awful. Worse, rates that are normally lower for shorter-term debt were actually higher at that time.

The stock market of Reagan's first year in office lost money, as measured by the Standard & Poor's 500 index, which slumped 9.7 percent in 1981. But it turned around and made money for investors every year after that, peaking with a 26.3 percent gain in 1985 and even making a modest 2 percent gain in the crash year of 1987.

The S&P 500 record over the eight calendar years of the Reagan presidency: an average gain of 14.2 percent, producing a cumulative advance of 188 percent with dividends included.

How much credit investors choose to give Reagan for that turnaround depends mostly on how much emphasis they place on psychology.

''Presidents don't have a big impact on the market," says veteran investment manager Ken Heebner of the CGM Funds in Boston. ''The strength of the economy is who Americans are as a people, in terms of innovation, creativity, and leadership."

Heebner argues that the more important influence was a Federal Reserve finally making progress in its fight against inflation. Still, he gives Reagan credit for the stimulative impact of controversial tax cuts and the importance of a good communicator telling an optimistic story during hard times.

The single most important factor behind the bull market of the 1980s, he suggests, was the incredibly cheap stock prices at the start of the decade. At that time, the stock market sold at a price equal to about 6.5 times earnings, or less than half of today's ratio.

To John Spooner, cheap prices are inconsequential if no one is willing to buy. Spooner, a longtime Boston money manager and author, is a big believer in the idea Reagan helped to rebuild confidence in markets.

''The business I'm in is not a real business," says Spooner. ''It's a state of mind. Emotion is really the key to the stock market."

The Reagan influence on the stock market revival was as obvious as it was impossible to quantify. It isn't even easy to mark the beginning and the end of his impact.

The stock market of the Clinton years performed even better, averaging gains of more than 17 percent to an admittedly overpriced peak. But would those advances have been possible without the end of the Cold War and other earlier events?

US financial markets will close Friday for Reagan's funeral. It's a good opportunity to appreciate the power of a professional optimist.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.

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