John F. Kennedy said, “A rising tide lifts all ships,” because what benefits businesses, benefits everyone.
After his death, Congress passed his 1964 Revenue Act that lowered top individual income tax rates from 91% to 70% and reduced top corporate rates from 52% to 48%. As a result, unemployment fell from 5.2% in 1964 to 3.8% in 1966. And although “experts” had predicted lower tax revenues, federal income tax revenue actually rose in 1964 and 1965 as the economy expanded.
The 2017 Tax Cuts and Jobs Act also lowered tax rates and had a similar effect on the economy. If the economy had not been firing on all cylinders before the COVID-19 shutdowns, unemployment would be much worse than it is today. And government aid to businesses during the pandemic also helped those who depend on the businesses for jobs.
A stronger Wall Street boosts Main Street because small businesses depend on goods and services from large corporations. This inter-dependency became very evident when store shelves became bare of certain essential products, but that situation is slowly improving as the economy recovers.
Uncertainty drives stock prices down, and this year has seen more than its share of uncertainty. Stock markets crashed in March when the shutdowns began. But now the future appears more certain as doctors develop COVID-19 treatments, vaccines show promise, and states slowly relax restrictions, so stock prices have largely recovered. The S&P Index and the Nasdaq Index have reached record highs, and the Dow Jones Index is approaching highs for the year.
The stock market recovery is encouraging for a number of reasons. First, pension plans invest in stocks and bonds, so the recovery improves the funding of pensions. And insurance companies invest premiums paid by policyholders to cover future claims, so insurance companies are shored up by improving financial markets. Some insurance companies have even refunded a portion of car insurance premiums because people are driving less, but they couldn’t have done so if the values of their investment portfolios hadn’t recovered.
And many individuals are directly invested in financial markets through 401(k) plans. After the March stock market crash, the recovery in stock values is a big relief to those with such retirement plans. Some had even put off their retirement because the values of their 401(k) plans had fallen so far.
Also, there is a wealth effect which boosts the economy. When their 401(k) plans increase in value, people are more willing to spend money because they feel more confident about their financial futures. And homeowners tend to spend more when the values of their houses increase. Home values have largely recovered from the plunge in April and May, with some areas seeing highs in home sales and median prices for the year. In addition, many homeowners have reduced their payments by refinancing their mortgages to take advantage of the historically low interest rates.
But the most important aspect of the stock market recovery is that changes in stock values are a leading indicator of future economic activity. Stock market trends predict changes in the economy a year or more down the road. The predictive power of stock prices is much better than that of pundits, because the millions of investors have skin in the game. So, everyone should be encouraged by the rise in stock prices because it foretells better times ahead.
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