- The Washington Times - Thursday, October 5, 2006

The Dow Jones Industrial Average (DJIA) closed at record highs this week, surpassing its previous high-water mark achieved during the heady days of early 2000. Only this time, the legendary stock index doesn’t have the bubbly appearance that became so apparent (admittedly, in hindsight) as various stock indexes crashed from 2000 through 2002.

While only the DJIA has returned to record-level territory, the other two major stock-market indexes — the S&P; 500 and the Nasdaq composite — have also experienced remarkable recoveries in recent years. Given the fact that today’s stock-market valuations have followed extraordinary increases in corporate profits — e.g., profits during the first half of 2006 reached an annual rate of nearly $1.6 trillion, 86 percent higher than profits during the go-go year of 1999 — it is fair to say that the market gains achieved in recent years exhibit far more sustainability than those of the late 1990s. It is also fair to say that the two principal tax cuts passed in 2003 — reducing the top capital-gains tax rate from 20 percent to 15 percent and reducing the top tax rate on dividends from nearly 40 percent to 15 percent — made a significant contribution to the stock-market resuscitation that has occurred since then. In fact, since Congress passed the cap-gains and dividend tax cut in May 2003, the DJIA has increased by 3250 points (38 percent) to 11,851 (through Wednesday); the S&P; 500 has increased by 46 percent; and the Nasdaq has increased by 53 percent.

It is a waste of time lamenting the fact that the S&P; 500 and the Nasdaq, which closed Wednesday at 1350 and 2290, respectively, have not reached their record highs of 1527 and 5048. Given 1999’s relatively paltry profits (compared to today), those stock-market highs, which occurred in March 2000, approached tulip-mania territory. Over the preceding 18 months, the S&P; 500 surged 50 percent, while annualized profits increased only 3 percent from the third quarter of 1998 to the first quarter of 2000; meanwhile, the Nasdaq soared nearly 70 percent in the preceding four months, rising from less than 3000 in November 1999 to more than 5000 in March 2000. Tulip-mania, indeed.

It is far more instructive (and illuminating) to compare today’s stock-market (and profit) levels with those that prevailed about 10 years ago, when then-Federal Reserve Chairman Alan Greenspan warned about “irrational exuberance” on Dec. 5, 1996. On that day, the DJIA closed at 6437, and has risen 84 percent since then; the S&P; 500 closed at 744, and has increased 81 percent since; the Nasdaq closed at 1300, and has advanced 76 percent since. Meanwhile, annualized corporate profits earned during the first half of 2006 are more than twice the level of profits earned in 1996.

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