By DAVID MOON, Moon Capital
December 3, 2006
It became evident in the weeks just before the recent
election that Democrats would make substantial gains in both houses of Congress.
With analysts correctly anticipating that the Republicans would lose control of
at least the House of Representatives, most U.S. domestic
stock-market indices reached five- and six-year highs. The Dow Jones Industrial
Average reached an all-time high.
Coincidence? Not if you ask a
Since the election, we've had some horrible days on Wall
Street. Just this past week, the Dow declined 205 points on the two trading days
straddling Thanksgiving ' typically, slow, uneventful days on Wall Street. These
declines coincided with endless television appearances by the new Democrat House
Speaker-to-be and talk of a return to 1992's failed health-care reform effort by
New York's junior Democrat senator and former First
Coincidence? Not if you ask a
In the big scheme of things, it doesn't much matter which
party is in power. Sure, I expect the Democrats to try to raise taxes on 'the
rich,' which probably includes most people who read the second page of the
Business section of the News Sentinel ' no matter how middle class you feel.
And I'm certainly not looking forward to a possible
increase in capital-gains taxes. The current 15 percent top rate lets investors
make capital-allocation decisions based more on economic factors than on
artificial tax considerations.
This phenomenon is known as not letting the tax tail wag
the economic dog. With high capital-gains taxes, investors will often continue
to hold stocks of companies that are mismanaged or overpriced, simply to avoid
This can reward poorly run companies while depriving
deserving companies of needed capital.
In the short term, anything can affect stock prices, and that certainly
includes political shenanigans. But in the long term, stock prices are a
function of earnings and cash flow, and politicians just don't think or act
long-term. For politicians, the economy is much like the weather: they all talk
about it, but don't really do anything about it.
Two exceptions come to mind,
If you change the structure of the economy, you can
impact corporate earnings. Lyndon Johnson and Richard Nixon did that by creating
massive government programs and departments. Once created, each new entity acts
like economic kudzu, constantly expanding, out of control. This bureaucratic
weed drains nutrients from the rest of the economy, slowing economic growth and
By contrast, in the 1980s Ronald Reagan's tax-code changes caused a
positive structural shift in the way investors allocated capital. Prior to 1986,
many investment decisions were based on tax considerations, causing people to
pour money into overpriced or otherwise undeserving investments.
Although politicians have tinkered with taxes since then, lower rates and
fewer brackets remain with us today and continue to pay positive dividends for
the economy and for investors.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).