A Picture Worth 2000 Points

Today, there's a lot of people looking at Obama's method of handling the economy, and then drawing comparisons to Jimmy Carter. They point to the fact that it was the Reagan tax cuts (The Economic Recovery Tax Act Of 1981), and not taxing and spending, that really got this country going after the disaster of Carter.

Even though the Carter economic problems aren't exactly the same as now, there are some parallels to the government intervention that caused the dramatic rates of inflation and that contracted our economy during those years. Actually, to be fair, some of that government intervention started with the Nixon Administration in terms of trade barriers. Certainly, if you want to read all about the Nixon/Carter years and their economic policies, there's plenty of information on the Internet about them.

My focus of this blog entry, is to show you the reaction of the stock market to the various governmental programs/influences of that time frame; from Nixon, to Ford, to Carter and, to Reagan.

When Nixon left office, the stock market responded with a mini-crash. It did so because of the psychological impact of having a tarnished Presidency. At the same time, the country was beginning to enter another recession. After settling in, Gerald Ford's tenure ultimately saw the markets rebound. Ford's attempts to get reelected were squashed from the onset by Nixon's ethical problem. A problem that took a further toll on almost any Republican who was running for office. Through three consecutive election cycles, the House and the Senate went strongly to the Democrats; even stronger than today. Prior to Nixon's problems, the Republicans had gained traction as a result of the Vietnam war and LBJ's failed handling of that situation.

Carter came into office by riding the white horse of restored ethics and the promise of economic recovery. However, his policies, both domestic and foreign, and the policies of the Democratic Congress were disastrous. The OPEC embargo was responded to with price controls. Inflation was rampant. Carter's handling of the Iran hostage situation was terrible. When Carter left office, after just one term, the inflation rate was over 12% per annum; and, in some parts of the country, it was even higher than 14 percent. Wages were absolutely lagging behind inflation. Mortgage rates were all in double digits.

Reagan came into office with a commitment to a better foreign policy and a promise to attack the economy with tax cuts. Something called supply-side economics and better know today as Reaganomics. Just like now, the stock market continued to fall after Reagan took office as investors waited to see his plan for recovery. However, unlike the response to Obama's plans, the stock market fall was extremely muted. Obama has seen nothing short of a complete collapse of the markets with every piece of information that he has released about his plans. Unlike Obama, Reagan took his time in putting a plan together. He submitted it to both the public and to Congress and, didn't just give some outline to Congress for them to interpret. Unlike Obama's Congress of today, Reagan had an opposing, Democratic majority in Congress to overcome with his proposed recovery. He truly had to get a bipartisan agreement to do what he wanted. In August of that year, the Economic Recovery Tax Act of 1981 was passed and signed by Reagan.

Unlike the rapid fall of the stock market of today, which has followed Obama's Stimulus Bill, the stock market under Reagan tread water for the next year and until it could see the fruits of those tax cuts. Once it did start seeing the inklings of a recovery, the market was off to the races by gaining 2000 points; from a level of 800 to almost 2800. The tax cuts created a growth in the econom, and without any of the runaway inflation that occurred during the Carter years.

It should also be pointed out that Paul Volker was the Fed Chairman of the time. It was his accommodative lowering of interest rates that fought off and lowered inflation in 1981 and 1982. As a result, inflation dropped from a high of 12.5% under Carter to 3.8% in 1982. He is currently on Obama's team but seems to be somewhat forgetful of what was done in that era.

The only problem with Reagan's tax cuts was that it overheated the economy and subsequently, the stock markets. As always, it was the excess of buying into the stock market, like the home buying of this last decade, that set up a scenario for failure. As a result of too much exuberance, the market crashed in 1987. Even so, the economy was in great shape and the market recovered more than 60 percent of the 1987 losses in just one year; and, then went on to even greater heights within another 2 years.

The point of all this is to show how differently the stock market responded to Reagan's plans as opposed to those being presented by Obama. Literally, the stock market stopped it's fall after Reagan's passage of the tax cuts in 1981. Obviously, the market's appraisal of the situation was a correct one. We know this from the rocket rise of the markets from 1982 and all the way into the Clinton/G.W. Bush years. In contrast, the stock markets have continued to fall with the ever passing disclosure of Obama's various recovery plans.

So, given the market actions of today, what do you think the stock market is really saying? It certainly isn't saying that Obama's Keynesian belief in big government spending, high taxation, and vast government regulation and control will get us out of this recession. Also, it certainly isn't buying all the "smooth talking" coming out of this so-called communicator. The markets are responding with disbelief and they aren't buying Obama's explanations. In 1981-1982, the stock markets were right in betting on the words and programs of Ronald Reagan. And, today, I am betting that they are right in responding negatively to Obama. And, that's just my opinion.

Note: You can get a larger, clearer view of the above stock market chart by clicking on it. Use your back button to return.