Follow the Gipper

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Posted: Sep 19, 2017 12:01 AM

Markets continue to soar in part to the assumption that tax cuts are coming sooner or later. All we have to do is to convince Republicans that supply-side economics work.  I present exhibit A:

Reagan’s Economic Template

Does Reaganomics work?  This question continues to be asked as if it’s an untested theory. While there are always unique factors that influence the economy, evaluating a system or an approach is difficult and to a certain degree, it’s up to interpretation. How much did Bill Clinton benefit from the technology boom, and how much was George Bush hurt from the technology bust?

Using key metrics, however, it can be argued that Ronald Reagan’s eight years of the presidency were an economic miracle that returned American prosperity.

Economic Growth

The Gross Domestic Product (GDP) Growth was amazing, averaging 3.5% per year, over an eight-year span that achieved a mind-blowing 7.3% in 1984. 

Employment

The job boom was remarkable as well; 16.5 million jobs were added as the percentage of people working climbed to 63% from 59%. Participation moved toward an all-time high point.

Reagan Job Boom
December 1980
December 1988
Civilian Non-Institutional Population
168,883,000
185,402,000
Employed
99,634,000
116,104,000
Participation Rate
63.9
66.1

Source: https://data.bls.gov/pdq/SurveyOutputServlet

 

Incomes

Wages soared under Ronald Reagan.  In current dollars at the time, median income leaped - 54% of the (adjusted for inflation) median income increased by $4,000 or 8.1%. 

Reagan Income Boom
1980
1988
Current Dollar
$17,710
$27,225
Inflation- Adjusted
$49,131
$53,124

Source: https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-households.html

 

Regrets?  He made a few…                                

Reagan’s “Greatest Regret” was the 186% increase in U.S. debt under his watch.  A big chunk was devoted to building the military and defeating the Soviet Union. However, for the small governmental president, it remained a sore spot.

Bottom Line

I continue to ponder the persistent questioning of Ronald Reagan’s successful revitalization of the American dream. The good news is that he left a blueprint with his legacy:

  • Tax Cuts
  • Regulatory Cuts
  • Stable Monetary Policy
  • Strong U.S. Defense Capabilities

I sense the stock market knows that portions of Reagan’s formula will become law, and inject this economy for a run that attempts a return to its former glory. 

The Market

The rally is consolidating; internals is getting better and hints at a strong leg higher.

Market Breadth
Movers
Advancers
Decliners
NYSE
1,807
1,070
NASDAQ
1,763
1,158

 

Market Breadth
Milestones
New Highs
New Lows
NYSE
112
10
NASDAQ
150
31

 

Last Friday, the Dow and S&P 500 eked out fresh record closes; the NASDAQ Composite Index was right there. Don’t look now, but the Russell 2000 might be the index that outperforms for the rest of the year.   

There is a lot of buying of garbage names because even the worst stocks can be oversold (and from time to time, the best companies/stocks can be overbought). 

Hence, look for the Russell 2000 at 1,450 where it forms a double top, which is typically a bearish formation, although it doesn’t mean a big pullback. Moreover, if the index pierces through that point, it will be off to the races.