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Welcome Economic Signs

April 21, 1998

The Dow Jones Industrial Average jumped nearly 12 percent in the first quarter of this year. Economist Lawrence Kudlow credits what he calls "three economy-wide tax cuts that have occurred in the last 18 months" for the stock market's powerful surge.

Here are the three factors:

  • With inflation dropping from near 3 percent to about zero, effective tax rates -- particularly unindexed capital gains taxes -- and interest rates are lowered, increasing after-tax economic returns.
  • The cut in the federal capital gains tax rate last July, from 28 percent to 20 percent, has encouraged people to invest and helped drive up stock prices.
  • The nearly 30 percent decline in oil prices since late 1996 has led to huge cost reductions for businesses and consumers -- as well as generating greater productivity and higher returns.

Kudlow notes that many economists under-predicted economic performance during the last several years, failing to take such factors into account or under-weighting them. These pleasant realities lead him to predict a 10,000 Dow by the end of this year, and 11,500 by year end 1999.

Source: Lawrence Kudlow, "What's Feeding the Ballistic Bears?" Washington Times, April 21, 1998.


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