The April issue of Money magazine has some advice for investors.
"If history holds," it says, "passage of Carter's tax cut would lead to higher stock prices.
"Says Jack W. Lavery, economist at the Provident National Bank of Philadelphia Federal taxes have been substantially lowered on nine occassions over the past 15 years: in every instance there was an uptrend in stock prices for at least three months following the Senate-House conference commitee's clearing of the tax bill . In the three instances when taxes were increased, stock prices dropped.
Lavery thinks Carter's proposals represent a significant overall tax cut.
"Another bullish pointer from the historical record: going all the way back to 1888, stocks have shown a gain in every year ending with 8 except 1948."
Before you hock the family jewels and plunge into the stock market, let me make a couple of observations:
The Carter package of higher Social Security taxes and lower income taxes for some maybe, but maybe not, except February, which has 28, can turn out to be a tax increase, a tax decrease or a giant-sized nothing.
Whenever somebody tells you that the market has "always" done something in a certain pattern, you can be sure that this dramatic generalization will be followed by an anticlimactic "except." The closest thing to certainty about the market is that it will fluctuate; but it doesn't even do that with absolute certainty.
Even the most highly paid market analysts - the fellows who advise banks and other institutional investors - are fallible.
Basically, a company's stock goes up or down on the basis of the firm's earnings. An analyst for institutional accounts may specialize in a single field - for example, chemicals, oils, autos. He tells his clients how much per share he expects various companies to earn in the coming year, and even in the year after that. The analysts aren't egotistical enough to make their predictions to the penny, but they do round off to the nearest nickel or dime. They'll say thinks like, "Look for earnings of $5.80 a share this year, $7.25 next year." When their estimates hold up, those who follow their advice can make a lot of money.
The small investor can't afford the kind of guidance "the funds" get from their analysts. So the little guy's best bet is to follow Standard & Poor, Value Line, or even lower-priced "retail" advisory services. Some merely follow the free advice available from brokers and the financial press - some of it self-serving and much of it unreliable.
Some small investors explain their losses by pointing out they didn't have access to the expert advice on which the big guys base their moves.
This explanation sounds plausible, but two finance professors at Texas A&M indicate it doesn't hold water. From another item in Money we learn that the professors found a margin of error of from 16.6 to 30.1 percent for the high-priced institutional analysts, and a margin of error of from 18.9 to 28.6 percent for the "retail" advisers available to small investors. In other words, all analysts are wrong a substantial percentage of the time - often enough to give their followers a sporting chance to go busted.
The top story in the Wall Street Journal a few days ago said that many analysts expect the stock market to come back to life soon. Any sign of a resurrection will attract buyers.
Those with a modicum of sophistication need no advice from me. But for the novice tempted to jump in, I have one word of advice: Don't.
Until you're absolutely sure you know what you're getting into, keep your money in the bank. For at least a year, place only make-believe buy and sell orders. In the jargon or race track habitues, "Make mind bets."
Occasionally, you'll pick a winner and kick yourself for not having invested real dollars instead of make-believe dollars. But if you keep an honest written record of all your mind bets, you will probably find that you have lost more than you made. Then add the brokerage commission on each buy and sell order and you'll discover that your make-believe loss has increased substantially. When you buy 50 shares of Consolidated Buggywhip at 60 and sell at 61, you haven't made anything; you have lost money.
At the race track they warn you that horse players die broke but people who make mind bets merely lost their minds. You can also lost your mind in Wall Street, but at least you won't have to pay brokerage commissions on your make-believe portfolio.