The stock market has gone straight up in the first 13 trading days of 1987, advancing about 200 points as measured by the most closely watched index, the Dow Jones Industrial Average. Current levels are double what they were just a year and a half ago.
What is this raging bull market trying to tell us? I detect several messages:
Most important, stocks love falling interest rates. Interest has been falling steadily since it peaked out at double-digit levels in the early 1980s. These declining rates make current yields worth more. Also, business can borrow more money at less cost for research and development, expansion, inventory building, etc. This in turn stimulates the economy.
The market also likes lower inflation . Last year inflation was at its lowest level in decades. Of course, interest and inflation move together. In some sectors of the economy, "deflation" would be a more correct description of what is going on. In "real" terms the stock market at the 2,100 level is still below the 1,000 level in relation to 1973 dollars. And prices of certain key elements of our economy continue to decline--computation, communication, transportation, etc. Furthermore, the American and world economies have benefitted greatly from declining oil prices. Energy is such an important part of the cost of business and the cost of living that it can take the lion's share of the credit for lower inflation and interest rates.
The market is pleased with stable and lower wage rates. Cooperation, rather than confrontation, between management and labor has been increasing the productivity of the United States. Companies that are doing best are those with enlightened and harmonic labor relations. We are the envy of the world with our 8 million new jobs that have been created since 1980, and with an unemployment rate that is the lowest in decades.
The stock market is euphoric about the new tax law. Everybody can now spend less time on sheltering income from taxes and can get on with the business of investments, which makes economic sense. Some stores have already reduced prices because of the lower tax rates on corporations. Also, lower marginal rates will significantly stimulate individual and business incentives. For example, here in California a person who is in the highest federal and state tax bracket previously paid 61 cents in taxes on the last dollar of earnings (50% federal and 11% state) and kept 39 cents. Now it's just the reverse. That person will keep 61 cents and pay 39 cents in taxes.
The market likes the decline of the dollar against other major world currencies. Soon, we hope, our export levels will increase as American goods, when they are measured in foreign currencies, decline in price. Also, as the prices of imported foreign goods rise, Americans will increasingly "buy American." We can't do worse in 1987 than we did in 1986--a $175-billion trade deficit.
The market also likes the restructuring of American business, which our free economy has fostered and encouraged. Resources are being transferred to better use as outside managers are threatening entrenched managements with takeovers, mergers, etc. Besides, all this takeover activity simply adds to the evidence that the price of many companies' shares are still undervalued. So far government has kept out of this healthy process, and this will result in a leaner, more competitive American economy.
The market is very attractive to foreign investors. Some Japanese brokers are even recommending to their clients that one-half of their equity portfolios be invested in U.S. stocks. Moreover, all of this increased demand is taking place while the supply of stocks is being reduced because of all the mergers, leveraged buy-outs and corporate stock-repurchase programs.
The market, at an all-time-high level, is good news not only for stock owners but also for workers (more jobs), management (security and higher pay), the needy (more tax revenues for social programs) and society's general well-being.
The really good news is that the stock market is a leading indicator. It is telling us that the economy will continue to improve over the next six months or so. Actually, by making shareholders feel richer, rising stock prices in a market with a $2.8-trillion equity pool encourage us all to spend more, thereby fueling the economy.
The stock market is shouting to us that it is euphoric over lower inflation levels, over lower oil prices, over lower interest rates, over stable wage costs and over improvement in productivity.
The one glaring problem continues to be the size of the federal deficit. These are the good times when we should be balancing the federal budget and even running surpluses. One can only imagine what the market would do if we could solve the double problem of the budget and trade deficits--the Dow might even go to 3,000!