In 1982, what spark lit the fire that took the S&P off it's lows? (August 11, 2001)

  Recall that in the late 1970's the U.S. had suffered inflation and no growth ('stagflation'), and the goal was to end inflation and thus allow the economy to grow once again. To do this, the economy was purposefully slowed, and then was jump-started with the Emergency Economic Tax Recovery Act of 1981 that gave massive tax incentives to invest in business. Investment tax credits, accelerated depreciation, a substantial reduction in marginal tax rates, and a reduction in the capital gains tax all combined to launch investment in the U.S. by businesses and individuals in the U.S. The result of this investment was the technological boom that we enjoyed for 20 years that also saw no inflation and as close to full employment as you can get.

So, what happened back in 1982? Well, at that point investors saw the investment that was being made in U.S. businesses, and they started to price expectations of the boom to come into stock values. That led to the 72% gain in the S&P 500 over the next 12 months and the subsequent gains thereafter.

That is why we feel that the current tax cut is not really a meaningful cut because it does not solve the root of the problem, i.e., getting businesses and citizens to directly invest in the U.S. Instead we are taking a longer, less effective route, relying on the consumer demand to remain high enough for a long enough period of time to work off business inventories and get businesses spending again on production. Why did we not cut to the chase and give businesses and you and me reason to invest in business? That would immediately impact the bottom line and jump the economy into gear. All of that money that the Fed wants banks to lend would go right into business. If I can get a new computer network and telecom system and receive a tax credit for doing it, it is a no brainer. Bang. Right then and there several computers, at least one router, software, and a telephone system are bought. Multiply that by the millions of businesses from home offices to major corporations throughout the U.S. and you have once again investment in the U.S. And despite the propaganda to the contrary, tax revenues would once again increase by virtue of the burst of business activity generated just as it did in the 1980's.

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