Everyone knows that the stock market is soaring, perhaps too much. The Dow went up 24 percent in 2017. That’s not a record, to be sure, but it ain’t bad by any means. (The record year was 1915 when the Dow-Jones Industrial Average went up a staggering 81.66 percent, thanks to an avalanche of orders to American companies for war materiel from Britain and France. The second best year was actually 1933 when it rebounded from a disastrous low and climbed 63.74 percent.) This year, a grand total of four trading days long at this point, the market has gone up 502.2 points–slightly over 2 percent–to close above 25,000 for the first time.
This very strong start after a very strong year is, however, reminiscent of 1987. That bull market peaked in August and crashed in October when the Dow fell 22 percent in one day. The market would have to drop 5,400 points in a single day to go down 22 percent from its present level.
Is the market headed for another crash this year? Well, if I knew the answer to that question–and especially if I knew when the peak would be–I’d be a rich man by Christmas. But the crash of 1987 came in the midst of a historic economic expansion. The economic boom that began in 1982 featured some years in which the GDP expanded by as much as 7 percent. The current euphoria on Wall Street comes after eight years of anemic economic growth. Only in 2017 did we see two consecutive quarters with more than 3 percent growth.
And there are many signs that the economic engine is beginning to roar. Construction jobs, for instance, increased by 210,000 last year after being stagnant for a long time. They went up 30,000 in December alone, usually not a good month for construction because of the weather. More, manufacturing had its best year since 2004, with the index at 59.7 (anything above 50 means expansion). Black unemployment is now at its lowest level since the Bureau of Labor Statistics began keeping track in 1972.
As a result, wages are beginning to rise after largely stagnating since the recession. With unemployment at only 4.1 percent, a quickly growing GDP will force employers to up the ante to get workers in 2018. And the tax cut will put more money in the pockets of nearly everyone. The cut in the corporate tax rate should have a positive effect on stocks as those tax cuts go right to the bottom line as increased after-tax profits. This is good news for 401Ks and IRAs. (To be sure, the market has already taken this into account.)
The net result is likely to be what economists call a “wealth effect.” If people feel richer, they are likely to act accordingly and increase spending. That, in turn, pushes up the GDP and the economy enters into a positive feedback loop. The wealth effect was a major factor in the booms of the 1960s, 80s, and 90s.
The Obama economy was very good for the rich (funny how leftist economic policy always does that). There are no guarantees, but the second year of the Trump economy might be a very good year for nearly everyone. If that turns out to be the case, I’d advise Nancy Pelosi to hold off on ordering new curtains for the Speaker’s office. Voters don’t often vote against prosperity.
