Why be cautious with such hot financial markets, corporate tax cuts around the corner and the promise of tax reform?
Posted By RichC on October 13, 2017
The early 1980s were challenging as manufacturing headed overseas, inflation ate up the buying power of every dollar and the cost to borrow was at an all time high. In fact, Brenda and I were giddy to have acquired a 12% mortgage on our first house in 1982 because our friends were applying for new mortgages at 18-21%. For us though, times were pretty good, mostly because we didn’t know any better. Both of us had finished college and were starting our careers; we were still driving inexpensive cars and living like college kids. Our dates nights consisted of the $1 cheapo movie theater in downtown Kent, Ohio (a college town) … or maybe free tickets to the Cleveland Orchestra either downtown or at Blossom Music Center. A meal out meant getting a burger, salad, fries and Coke all for $1.99 deal at the Red Barn in Streetsboro. Even after our little Aurora, Ohio house and crazy boat payments, we were able to comfortably able to save money and invest those dollars in high interest money market savings or the recently discovered promise of growth in the stock market … growth … which it did, until it didn’t.
Those high returning years seemed to be just the way markets were suppose to go for newbies who were saving money in order to expand a home evening printing business (I was rebuilding and running printing presses in my garage and basement). Eventually I opted to leave my job (rather than move) and took the risk to start my own company. Once committed, I bought and remodeling a commercial building, so the next big step was to use the money we had invested to make capital purchases and hire employees after the encouragement from President Reagan believing in America and pitching tax reform (listen to his speech). Lower taxes and business friendly reform stimulated business and the economy – all wanted to be entrepreneurs. American businesses were finally going to be able to grow and compete … the risk was finally worth taking. America was back!
So step two was for Brenda and I to head to the Graph Expo at McCormick Place in Chicago that autumn of 1987 in order to place the order on a new 2-color press and miscellaneous equipment. We check our investment savings, loved seeing it continue to grow, and were ready to go … until we weren’t.
The point of this reminiscing is that I’m having a déjà vu moment where our economy has been struggling for years and President Trump and the GOP lead congress is promising tax cuts and tax reform. Investors and the stock market loves it and continues to power higher on the optimism the economy is going to grow – rightly so, it should after a deep recession and 8 years of an anti-business Obama administration.
BUT … those of use who remember the tax reform of 1986 followed by Black Monday in October of 1987 … are a tad bit hesitant about going all in. Markets don’t always respond as we expect, as I recall. In fact, the stock market lost 22% in one day and wiped out a full year of gains plus the losses on the new money we had put to work in equities. Should we learn a lesson from this history, or as some would say, "it’s different this time." It always is, until is isn’t.