November 04, 2004,
When Jackie Gleason played the character of Joe the Bartender, one of his famous lines was, “Mmmmmmm, how sweet it is!” For Republicans, the outcome of the 2004 national election couldn’t be any sweeter. Same for investors. The bull market in stocks is now likely to resume, and it should sustain for some time to come.
Why? Once again, capitalism triumphed over socialism.
The socialist crowd in America never gets it and never will: Tax-rate cuts are good for all Americans. The godfather of tax-rate cuts Arthur Laffer will tell you that tax-rate cuts are not meant for rich people; they are meant to increase the incentive for everyone to produce, invest, and save. Such an incentive applies to all human beings, including those who are not rich but want to be rich.
The Kerry-Edwards plan to raise taxes on hard-working Americans was an obvious nail in their political coffin. Kerry didn’t learn from the mistakes of Mondale and Dukakis, both of whom trumpeted tax increases in their economic platforms. Clinton kept his tax-increase plans a secret before his election; Kerry and Edwards were too arrogant to see the pitfalls of such a plan.
The confirmation that the 2004 election was a victory for capitalism was reflected in the unexpected victories of Republicans running for the Senate. The split will now be 55 Republican, 44 Democrat, 1 independent. The defeat of obstructionist Democrat Tom Daschle, minority leader in the Senate, signals a “fresh new start” for the Senate minority party. President Bush’s ability to get more from a Republican-dominated Senate should not be underestimated especially by investors.
The president is committed to further tax-rate cuts and tax simplification. Few market pundits connected the tax cuts of 2003 with the emergence of a new bull market in the second quarter of that year. Once flesh is put on the bones of the next tax-reform measure, the bull market should be well on its way to producing record highs for the Dow Jones and S&P 500 indexes. Small-capitalization stocks have already provided many shareholders with encouragement by achieving all-time highs this year. While 2004 will go down as a year of consolidation in stock prices at least up until November 2 the parallels to 1994 are unmistakable. NRO Financial’s Larry Kudlow calculates that the stock market is undervalued by 40 percent (prior to the election outcome). Did anybody forecast a record bull market in the aftermath of the Republican victory in 1994? If my memory serves me correctly, there were as many bears as bulls back then.
I would venture to say that we are in a much better economic position than we were back then. Certainly, President Clinton didn’t have a capitalist agenda for America when he came into office in 1992. But by the time the electorate ran the Democratic leadership out of the Senate two years later, Clinton at least recognized that his survival depended on a move to the fiscal middle.
In contrast, today we have a confirmed capitalist as our president and a capitalist majority in the Congress. By the middle of 2005, the Iraq war should be winding down, oil prices should be moderating, lower tax rates will be in effect, and global prosperity will be on the rise. The stock market should be moving higher and eclipsing the record highs of the year 2000 as a result of these changes.
Finally, President Bush will be in a position to nominate a number of Supreme Court justices during the next four years, an important factor in keeping capitalism the driving force in America. Ironically, even the beaten socialists will benefit from the capitalist system they detest.
Again, how sweet it is. We investors will take two businessmen running this country over two lawyers any day.
Thomas E. Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc. and chief investment officer for Victoria Capital Management, Inc.