This article was published by The McAlvany Intelligence Advisor on Monday, June 24, 2019:
Is it possible that a 78-year-old economist with degrees from Yale and Stanford Universities just might reelect President Donald Trump in November 2020?
Most people weren’t even aware that President Trump awarded him the Presidential Medal of Freedom – the nation’s highest civilian honor – last week for the impact he has had on the economy not only in the U.S. but worldwide over the last 35 years. Few know that the paper napkin on which he sketched the simplest of economic theories is now on display at the Smithsonian.
Arthur Laffer not only added the “Laffer Curve” to the lexicon, but “supply side economics” and “Reaganomics” as well. The concept was so simple that even New York Time‘s resident economist Paul Krugman grudgingly admitted it made sense.
Laffer was an adviser to the president during his 2016 campaign, helping to craft his tax policy, which would become The Tax Cuts and Jobs Act of 2017 – widely praised by corporate America for its reduction of corporate taxes from 35 percent (among the highest in the world) to 21 percent (among the lowest). As a refresher, the day after Trump was elected president (November 9, 2016) the Dow closed at 18,138. Last Friday it closed at 26,719, a gain of more than 8,500 points, or 47 percent.
The Laffer Curve is simplicity itself. It is predicated on the premise that lower taxes would result in increased economic activity.
Implementation of the policy has driven the U.S. economy, and Wall Street, to records. This month the economic expansion enters its 10th year, the longest in U.S. history. And the Dow is up almost 50 percent since the day after Trump won the presidency.
Can that continue?
Ivan Martchev, an investment strategist with Navellier Private Client Group, was among the first to call for the Dow to hit 30,000 very shortly. In early May, Martchev wrote that “the retail investors’ favorite index – the Dow Jones Industrial Average – looks like it’s going to 30,000 … the same way that charts … were bearish in late 2018, they are bullish now.”
And how long can this economic expansion last? Martchev answered: “The effects of Donald Trump’s policies will likely carry him through the next election without a recession … tax cuts have a major effect on economic activity and they tend to have a ‘second leg’ effect.”
When professional market forecaster Yves Lamoureux first called for the Dow to hit 25,000 in early 2016, it was trading around 16,000. He said it would take “three or four years.” It took less than two. Now, Lamoureux is expecting the Dow will hit 40,000 within the next two years.
That means that it will reach 30,000 first.
Barron’s , the highly regarded weekly investment magazine, predicted in early 2017 that the Dow would hit 30,000 by 2025. On Friday it revised its forecast: “The Dow could reach 30,000 much sooner than 2025.” It wrote: “So long as we can agree that precise targets are folly, we’ll drop [that 2025 date and conclude that] from here, that means 30,000 by the end of 2021.”
The economic fundamentals remain firmly in place. Existing home sales were up 2.5% in May thanks to mortgage rates that are now below 4% for the first time since January 2018. That is down from nearly 5% last fall, a savings of roughly $200 a month for the average home buyer.
Unemployment insurance claims remain close to record lows, but, more importantly, continuing unemployment claims decreased by 37,000 in the week that ending June 8.
Inflation remains tame and retail sales increased 0.5% in May compared to April, and April retail sales were revised upward as well. The services sector of the U.S. economy, which accounts for 88 percent of its gross domestic production, keeps expanding, with gains showing up at restaurants, electronics stores and sporting goods shops. Lower gas prices are resulting in increases in gas station sales, rising 0.3% in May from the previous month.
The policy statement from Fed chair Jerome Powell last week signaled that interest rates are likely to be cut – some say more than once – before the end of the year, a move that cheered Wall Street.
Wall Street is watching the upcoming trade talks between Donald Trump and Chinese dictator Xi Jinping later this week. A breakthrough, or just the suggestion of the possibility of one, would support Wall Street.
Strong economies tend to secure reelections of the man responsible. In this case, the man responsible isn’t Trump but the man standing behind him: the obscure, elderly economist from the Reagan Administration, the man who drew out the simplest of economic theories on a paper napkin and rejuvenated the U.S. economy, twice.
Peoples Pundit Daily: Paul Krugman, Supply-Side Economist
SeekingAlpha.com: The Dow Chart Says It’s Going To 30,000
McAlvanyIntelligenceAdvisor.com: It’s Yogi vs. Yves: Who’s Right About the Dow?
The Wall Street Journal: U.S. Existing-Home Sales Rose in May
The Wall Street Journal: U.S. Jobless Claims Decreased Last Week
The Wall Street Journal: U.S. Retail Sales Increased in May
MarketWatch: DJIA YTD chart