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Taking Stock
A true measure of consumer and business reality.


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Larry Kudlow

A Gallup poll taken in mid-June found that 45 percent of Americans thought the economy was improving; this compares to 40 percent in May and only 23 percent in March. In fact, the recent survey marks the first time since June 2002 when more consumers believe economic conditions are better (45 percent) then say they are getting worse (43 percent).

These poll numbers on the economy are not surprising. Since mid-March the U.S. stock market has increased 25 percent. Though most pundits don’t realize it, the stock market is the nation’s best overall measure of consumer confidence and business conditions.

Today’s stock market is no longer just a rich person’s game. In the past two elections two out of three voters owned shares. Nationwide one of every two families are investors, totaling nearly 100 million people. Hence, the stock market is not only a referendum on the economy it is also a key political barometer as well. One investor who will take great satisfaction from these results is none other than President George W. Bush.

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Clearly the market is sniffing out better times ahead. Since Congress passed President Bush’s powerful tax package that slashed marginal rates on investment, families, and businesses both large and small, the Dow average has jumped over 600 points. Since the mother-of-all-stock-market bottoms last October 9, the Wilshire 5000 index of the most actively traded stocks in the country has jumped nearly 30 percent. This move has recovered $2.2 trillion of shareholder wealth. No wonder people are feeling better about things.

At mid-year it is always customary to review the economic picture and revise the economic forecast. In addition to oversized tax cuts on investment and work effort, monetary policy has become much easier and deflationary threats to falling prices and profits have virtually disappeared. Science and technology continue to produce new advances. Productivity continues to rise, businesses are cutting costs and deleveraging balance sheets, accounting statements are cleaner, credit quality is greater, and national security is stronger.

The absence of any new terrorist attacks at home is perhaps the greatest blessing of the moment. Factories, office buildings, and financial exchanges are open for business. Working men and women are getting home to their families safely.

The free-market American economy, relatively unburdened by excess taxes and regulations, with monetary stability lately restored, and new free-trade initiatives on the horizon, has come through a tough period with poise and purpose. The long prosperity wave that began after World War II is set to cycle upwards, following another of the periodic interruptions that characterize market capitalism and gales of creative destruction.

There are always what ifs. Will the Fed provide sufficient liquidity? Will lower tax rates work as well for George W. Bush as they did for JFK and Ronald Reagan (and Bill Clinton in his second term)? Will terrorism strike again at home? Will energy flow freely at moderate prices?

But at the end of the day, good forecasting, like good policymaking, requires a vision. Mine is a simple one. President Bush is, in fact, the son of Reagan. His supply-side economic policies will produce strong growth. His homeland-defense policies will secure our domestic safety. His vision of spreading freedom and peace abroad, especially in the troubled Arab lands, will ultimately play out as successfully as Reagan’s goal to end Soviet and East European Communism.

In the spirit of fearless forecasting, I predict 4-percent real economic growth in 2004 and 2005, with double-digit corporate-profit gains for each year, and only mild interest-rate increases. Stock markets will rise nearly 50 percent from current levels, and by the end of 2005 the market averages will be back to the prior peaks registered in early 2000.

A few days ago, legendary investor and the Vanguard Group inventor of indexed stock funds, John Bogle, told me that buying and holding broad stock-market averages is the best way to create wealth in the long run. Not trading aggressively on numerous little things, like philosopher Isaiah Berlin’s fox, but keeping to one large vision, like his proverbial hedgehog.

When asked if his long-run view simply represented confidence in American business, Bogle said, “That’s exactly the right phraseology.”

I agree.

Mr. Kudlow is CEO of Kudlow & Co.



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