Whose Bull Market Anyway?

This article was originally published by the Washington Times.
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The Dow 10,000 story has prompted hundreds of explanations from pundits in Washington and on Wall Street as to how the stock market seems to magically defy the laws of gravity.

On March 30, The Wall Street Journal's front page contained a hugegraph of the market's rise since 1990, highlighting key historicalevents that have influenced the Dow's bumpy ride. These eventsincluded the Mexico peso devaluation in December 1994, AlanGreenspan's "irrational exuberance" speech in December 1996, and BillClinton's presidential election in November 1992.

Arguably the single most momentous event impacting the trajectory ofthe market in the 1990s is not even mentioned in this or any story weread about Dow 10,000. That event was the election on Nov. 8, 1994,that gave Republicans control of the Congress for the first time in 40years. On that date, the Dow was at 3,850. In less than five years,the Dow has nearly tripled in value. In just five years, nearly $10trillion of new financial wealth has been created.

The White House boasts of a Clinton bull market, but the evidenceargues persuasively that the market rally began its steep ascent inNovember 1994, not November 1992. Consider the market indicatorspresented below:

In Bill Clinton's first two years with a Democratic-controlledCongress, the Dow gained 600 points and averaged an 8.5 annual rate ofreturn. Not bad. But from November 1994 through today, the era of theGOP Congress, the Dow has gained 6,150 points and averaged a 24percent annual rate of return. Interest rates rose in Mr. Clinton'sfirst two years, but have fallen since the elections of 1994.

What explains the market's love affair with a Republican Congress?Partly it is that Republicans - for all their foulups anddisappointments - have passed some very economically beneficiallegislation over the past five years. The most important of all fromthe perspective of providing adrenaline for the financial markets wasthe capital-gains tax rate cut from 28 percent to 20 percent. This hassubstantially increased the after-tax rate of return on individualinvestments in the United States. The rate cut also has had afavorable unlocking effect, thus allowing investors to sell stockholdings in fading 20th century industries like steel and energy, andreinvest the gains in 21st century high-tech stocks.

Other bullish legislative victories by the Republicans have includedthe achievement of the first balanced budget in 30 years (though theGOP has been far too timid on cutting the budget for our tastes), theexpansion of Roth IRAs, which have turned out to be popular savingsvehicles for middle-income workers, and the historic welfare reformbill of 1996.

History teaches us there are five policy mistakes that can end a bullmarket. First is an inflationary monetary policy. Second is a taxincrease. Third is protectionism. Fourth is a huge expansion of thefederal budget. And fifth is unsound government interventions in theprivate market place, such as wage and price controls or the Hillaryhealth care plan. From the late 1960s through 1981, the United Statesviolated every single one of these policy rules, and consequently wehad a horrendous 15 year bear market. In 1982, the Dow bottomed out at850. As the Reagan tax, budget and monetary policies took hold, themarket began its now 17-year surge.

Today's policy regime is profoundly benign. Inflation is nonexistent.Republicans are likely to cut taxes, not raise them. Both Mr. Clintonand Republicans in Congress want to expand free trade, not curtail it.The budget is actually shrinking as a share of GDP - again not as fastas it should be falling, but the direction is favorable. And last butnot least, no particularly harmful governmental intrusions in themarketplace have seen the light of day on the GOP Congress' watch,though the health care area is worrisome.

Critics of this Congress and the last one have lambasted the GOP forits "do nothing" agenda. There is, of course, still much unfinishedbusiness in Washington, starting with moving toward a private IRA-typesystem for Social Security, cutting the fat out of the bloated federalbudget, and fixing the incomprehensible tax system. But with themarkets rising by 20 percent a year, unemployment at its lowest in twodecades, the budget in surplus, the inflation rate closing in on zero,and real incomes rising, there is something to be said for a Congressthat simply avoids doing monumentally stupid things. It's whenCongress gets active in passing laws that the markets get jittery.

Perhaps the real message for Washington of Dow 10,000 is that we coulddo a lot worse than two years of gridlock in Washington -and, alas, weprobably will.

Stephen Moore and Richard Weiss

Stephen Moore is director of fiscal policy studies at the Cato Institute. Richard Weiss is a portfolio manager at Strong Capital Management in Milwaukee.