Stock Markets and economies often travel in the same direction. Theoretically, the stock market is a leading indicator, meaning that its direction and movement precedes that of the economy. Apparently, investors are psychic.

If one looks at a chart of the best investment returns on a balanced portfolio of stocks and bonds, one notices a few interesting things:

First, the most profitable single year was from June 1932 to June 1933, after the huge stock market crash and the economy was still in decline, having hit bottom in March 1933. During this period, investors were making huge profits even though the economy was in decline. As a leading indicator, the market returns weren't born out until the 1940s.

Second, the Reagan years, 1982 to 1987, were the best 5 years the theoretical portfolio ever had. The return through the Clinton years, despite the mythology that has been actively perpetuated by the Clintons and the mainstream media, actually indicated a tapering off of profitability from a prudently balanced portfolio. To be sure, if one had invested in the Dot.com boom stocks, huge profits were attainable, but considering that many of these dot.com companies were operating at a loss, the inevitable bursting of the bubble then wiped out the investment gains, rendering severe losses to those who had gotten into the dot.com mania late in the game. Clearly, much of the "great economy" of the Clinton years was illusory and built upon a dot.com bubble much like the tulip mania of long ago. But all in all, it wasn't horrible. It was no depression. It was just that Clinton's policies couldn't sustain the boom of the Reagan years. If he just had not raised taxes, perhaps Clinton could have done better. It's an accepted principle that if one wishes less of an activity or product, tax it. So if one taxes income...DUH! One gets less income. People hide (tax shelter) income or they don't work as hard or as long.

Clearly, if one wants a booming economy, cut taxes. If a Democrat becomes president in 2008, we may see another demonstration of how to stifle an economy: Raise taxes. For now, however, the economy and the market outlook look good following the small correction we had in August.

Historical Best Stock Market Returns on a Hypothetical Balanced Portfolio of Stocks and Bonds (from Fidelity.com)

1 Yr. 87.38% Jun. 1933

5 Yr. 23.89% Jul. 1987

10 Yr. 16.38% Jul. 1992

15 Yr. 15.45% Jul. 1997

20 Yr. 14.51% Mar. 2000

25 Yr. 13.61% Dec. 1999

Footnote: In the interest of fairness, one notes that the Reagan boom had been tapering off before Bill Clinton became president. In equal fairness, one notes that the stock market, presaging the economy, had tanked in 2000 (beginning between January and March and not covered in the table above), a year BEFORE George W. Bush became president.