Writing on the Wall...Street
Charles Stahl
In his bicentennial State of the Union message, President Ford declared that the state of the Union is now better than a year ago, but not good enough, and proposed a budget of just under $395 billion for fiscal 1977, which would leave a $43 billion deficit. By comparison the fiscal 1976 budget is $374 billion and will result in a $76 billion deficit. By any standard the proposed budget for fiscal 1977 (which will start on October 1) must be considered overcautious and without any dramatic initiative, with the exception of a proposal which would defer taxes on money invested in common stocks, thereby stimulating capital formation.
Any American with yearly income of $40,000 or less will be eligible and may invest $1,000 to $1,500 annually in common stocks for a period of seven years. If the individual disposes of his holdings after seven years, the profit and the money originally invested will be taxed at the capital gain rate, which amounts to half the ordinary income tax rate. The US Treasury estimates that this plan will attract two and a half million Americans to invest in common stocks, thereby creating a flow of from $2.5 to $4 billion per year into the stock market. In my opinion the actual investment in common stocks on this tax preference basis will attract more than 2.5 million Americans. The current savings rate is one of the highest on record; in the fourth quarter of 1975 it rose to 8.2 per cent of disposable income, i.e. about $91 billion on an
annual scale. Since common stocks provide a better hedge against inflation than outright savings and the money invested in common stocks will enjoy a tax preferential treatment, I believe that maybe as much as $20 billion annually will be channelled into the stock market by new and eager investors. Of course this proposal by President Ford will have to be approved by Congress, which may or may not go along with it; however the mere disclosure of this investment scheme propelled prices on the New York Stock Exchange to a new high for the last twenty-seven months. On January 23 1976, the Dow Jones Industrial Average closed at 953.95, an unprecedented 101.5 point increase (or 11.8 per cent) in the first twentythree days of 1976.
Among other encouraging news for the stock market contained in the Presidential message was the forecast that in the calendar year 1976 the GNP will show a real growth of 6.2 per cent, which compares with a decline of 2 per cent in 1975 and of 1.8 per cent in 1974. The unemployment rate will average 7.7 per cent this year, which compares with 8.5 per cent in 1975. The growth in the US GNP is projected at 5.7 per cent for 1977, and the unemployment rate at 6.9 per cent. In dollar terms, the GNP in 1976 should be close to $1.7 trillion, and $1.9 trillion in 1977. Inflation as measured by the consumer price index was 6.9 per cent in 1975, versus 12.2 per cent in 1974, and it is now projected at 5.9 per cent for 1976 and 1977. This slowdown in the inflationary rate in the United States, combined with the dollar's strength in foreign exchange markets, should further attract substantial foreign investments in US equities, and this coupled with the domestic demand (historically election years have favoured the bulls on Wall Street) should bring the Dow Jones Industrial Average to new all-time highs.
Mr Stahl is President of Economic News Agency and publisher of Green's Commodity Market Comments
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