By Gary Alexander
I was three-for-three with my 2017 predictions. Although my picks were contrarian, it now looks like I was too timid about stocks. The stock market and the economy did far better than most pundits expected.
Here's a one-paragraph summary of each of my three 2017 predictions from a year ago:
#1: A 12% to 16% Gain in the S&P 500 in 2017. My first 'contrarian' pick makes me more bullish than the 15 most famous Wall Street analytical firms: In "How Will Stocks Make Out in 2017?" (USA Today, December 27, 2016), Adam Shell examined the 2017 S&P 500 forecasts from 15 major Wall Street firms. All 15 see a positive 2017, but most of them see only modest gains, averaging 5.5%. On the low end, five of the 15 analysts see an S&P 500 year-end reading of 2,300, only 2.7% above the 2016 year-ending benchmark of 2,239. Only one analyst (Jonathan Golub, chief equity strategist at RBC Capital Markets) sees a double-digit 2017 S&P gain, at +11.67%." The gain through Friday is about 20%.
#2: No First-Term (2017-2020) Recession Under Trump. It has been almost eight years since the current economic recovery began, and no growth cycle in U.S. history has stretched beyond 10 years. However, records are made to be broken. The 10-year recovery of 1991 to 2001 itself broke the previous record of 8 years and 10 months (February 1961 to December 1969), which broke the World War II record of 6 years and 8 months (1938 to 1945), which broke the previous record of five years. The reason I think this recovery will last beyond 10 years (to 2019 or later) is that 2009-16 growth rates have been so slow. A Goldilocks recovery (neither too hot nor too cold) can last longer than an overheated one." As it turns out, the anemic sub-2% growth rates under Obama have expanded to 3%+ in 2017.
#3: Gold Will Stay Above $1,000 throughout 2017. I'm about to go out on a limb, and risk $1,000 in doing so. Ivan Martchev's 2017 prediction (published here on December 13th) was that gold will fall below $1,000 per ounce in 2017. This has become a very popular prediction on the Web, republished on many sites. I'm taking a contrarian position by betting Ivan $1,000 that gold will stay above $1,000.
I'm so pleased with all three of these predictions that I will renew them all for 2018, along with the $1,000 gold bet - with the agreement of Ivan Martchev. Now, here is a new "contrarian" prediction.
New Forecast: Tax Collections will RISE by $150 Billion (4%) or More in 2018
The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.
-- Jean-Baptiste Colbert, Louis XIV's Finance Minister
On the road to visit family for Christmas, I picked up a copy of the December 21 USA Today and saw the Page 1 headline, "Government headed for $1 trillion deficit?" On the day President Trump signed the new tax bill into law, USA Today repeated the opposition's talking points by featuring this statistical subhead:
The tax package would cut government revenue by $135 billion in 2018, a figure that would rise to $280 billion in 2019, according to the Joint Committee on Taxation.
- USA Today, 12/21/17
I will predict the opposite: Tax revenues will rise by $150 billion (4%) in 2018, and $300 billion (8%) by 2019. I have history on my side. After all four major tax cuts in the last century, tax collections rose in the next several years - usually dramatically. No matter how many talking heads on television cite how many studies saying the opposite, I'd like to show them the following facts, which all support my case.
#1: In the 1920s, a series of tax cuts engineered by Secretary of the Treasury Andrew Mellon (serving Presidents Harding, Coolidge, and Hoover) reduced the top income tax rate from 60% down to 25%, but the amount of taxes paid by the rich (earning over $100,000) grew from $321 million in 1920 to $714 million in 1928 (source: Veronique de Rugy, the CATO Institute: "1920s Income Tax Cuts Sparked Economic Growth and Raised Federal Revenues.") These tax cuts fueled the Roaring 20s prosperity.
This was a general time of deflation and small government so total tax collections did not grow much, but the key point is that the proportion of taxes paid by the rich more than doubled from 30% to 61%. Also, from 1922 to 1929, real GDP grew by 4.7% per year and the unemployment rate fell from 6.7% to 3.2%.
#2: In the 1960s, the same thing happened under the Democrats. The Kennedy-Johnson tax cuts passed in 1964, shortly after JFK was assassinated. Tax collection growth was anemic in the early 1960s but took off dramatically after LBJ cut the top rate from 91% to 70%. Tax revenues increased each year - creating a surplus in 1969, despite LBJ's guns and butter policies, plus landing men on the moon!
It took a while for the tax cuts to work their magic but the average growth rate of tax receipts from 1961 to 1965 was a tepid 4.8%, while the average annual growth rate from 1966 to 1969 was a sizzling 12.7%.
#3: In the 1980s, the same story was repeated with the Reagan tax cuts. Tax receipts soared when the top tax rates were reduced from 70% to 50% in 1983, and then down to 28% in 1987. Notice the big boost in tax collections in 1984-85, and then a second, bigger boost in 1987 - despite a big market crash that year.
The 1980s began with high inflation and negative growth - "stagflation" - so I have included "real" growth rates to dramatize the leap from negative tax receipt growth in 1982-83 to over 6% real growth in 1984-85.
#4: In 2003-07, George W. Bush's tax cuts had the same effect - pardon the repetition. Tax receipts were steadily declining from 2000 to 2003, but when Bush cut top tax rates, tax receipts suddenly soared:
Tax receipts fell 12% from 2000 to 2003, but in the four years after Bush cut rates, receipts grew 44%. Tax collections rose $273.5 billion in 2005 and $253.3 billion in 2006, so I'm confident in predicting a paltry $150 billion rise in 2018. The evidence shows that the rich (like French geese) are more willing to pay taxes at lower rates. Econometric models predict lower tax receipts, but history says the opposite.
Next week, I'll return with more fearless forecasts for 2018…
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.