Tuesday, February 7, 2017

How Trump Can Create A Bull Market


How Trump Can Create A Bull Market

Steve Moore
‎ The stock market has risen about 9% since the election of Donald Trump with a near $2 trillion increase in wealth. Is this the start of a big bull market rally?
Investors are rightly euphoric over Trump's pro-business/pro-investor policies. But‎ Wall Street is coming to grips with the political reality that gridlock is the default position in Washington. Democrats have announced they are preparing an all-out defense against Trumpism as if they were trying to repel the Normandy Invasion.
So the market has been jittery in recent weeks, rising on Trump successes (such as the regulation roll back) and falling into despair when his economic agenda seems bogged down or he pursues bearish policies like tariffs on Mexico.




To get a sense of where the market is headed, it's wise to look at the historical parallel of the early years of another presidential disrupter: Ronald Reagan. Trump can learn from Reagan's mistakes and successes.
In the tumultuous first year and a half of the Reagan presidency the stock market fell. By the summer of 1982 the Dow Jones, which had been at 1000 had fallen to below 800. Adjusted for inflation that was more than a 25% decline in asset values. People were declaring Reaganomics dead.
Why were the first 18 months so negative for stocks and output? Part of the explanation was that the Paul Volcker-Reagan policy of wringing 14% inflation out of the economy caused a gut-wrenching recession. (But we had to take the medicine.)
Another big contributor was the delay in the Reagan tax cuts. What was supposed to be a 30% cut in tax rates in 1981 wasn't completed until the start of 1983. Worse, there was constant talk of suspending the tax cuts midcourse because of budget deficit worries, so investors couldn't even bank on the scheduled tax cuts.
But once the tax cuts were fully phased in — with income tax rates slashed from 70% to 50% and then eventually down to 28% — and the capital gains tax also was cut from more than 30% to 20%, stocks went on one of the greatest rallies in history. The market tripled under Reagan from its depths and then under Clinton the market more than tripled again. In 1982 the Dow was at 800. In 2000 the Dow was well above 10,000. Wow. The net worth of all U.S. assets rose from $18 trillion to $60 trillion.
That's called prosperity.
The stock market did very well under Obama, but most of that was the recovery from the 2008-09 collapse. Stocks aren't much higher today, adjusted for inflation than they were 17 years ago. So there is plenty of opportunity for a big prolonged rally as we saw in the 1980s and '90s.
What does Trump need to do to ensure this bull market?
First, declare as soon as possible that his tax cuts will be made retroactive to January 1, 2017, so businesses start investing now.
Second, suspend the ObamaCare investment tax hike. This would cut capital gains and dividend taxes ‎from 23.8% to 20% — and those lower rates will be capitalized overnight into higher stock values, for investors, pensioners, and other investors.
Third, don't wait on the tax cuts or the 10% repatriation tax. Demand that Congress enact this agenda in the first 100 days. There's no reason to delay until the second half of the year. This is making investors nervous that the tax cuts may not happen at all.
If Trump does all of these things — and soon — the corporate tax will be cut in half, investor taxes will be down about 15% and money will flow back to America from a lower repatriation tax. This would be the most bullish change in tax policy since the early 1990s. And If all that happens, the lower taxes on businesses and investors will translate into trillions of dollars of gains for investors and pension funds, with wages and GDP surging too.
That sounds awfully bullish to me.

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