Fifty Years Ago Today, The Stock Market Bottomed

At 4pm on Friday, December 6, 1974, the Dow Jones industrial average hit bottom. It closed at 577, the lowest it had been in twelve years, since the Cuban Missile Crisis of October 1962, and lower than any other close since. In 1973, the index was over 1000. The bear market of late 1974 was nasty. The recovery began the following Monday. Louis Rukeyser’s Wall $treet Week was grim viewing (as here) that dim stagflation-era evening. Buyers were rarer than scarlet tanagers in New York, the market gnome and birdwatcher said.

As for relevant events after the close, also that evening, two top Gerald R. Ford

administration officials, Donald H. Rumsfeld and Richard S. Cheney, went to a place a few steps from the White House and met with Jude Wanniski of the Wall Street Journal, possibly Congressional aide Grace-Marie Arnett, and economist Arthur Laffer of Chicago. This is the meeting at which Laffer first drew his curve, indeed on a napkin, showing that tax rates can be so high that if you cut them, tax receipts will increase.

A long-term market bottom is a significant historical event. The 62-year low of the Dow was this day fifty years ago. A major bottom means that at that point, economic sentiment was at its absolute lowest. Outlooks were sunnier at every moment thereafter.

The Laffer curve on a napkin, the story not public knowledge until Wanniski wrote about it in his 1978 book The Way the World Works, after which it became an immensely discussed item in political-economic conversation, was the news that happened between market close that Friday, December 6 and the following Monday’s opening. Important people were at the meeting, and the napkin without question became the symbol, the talisman of the forthcoming tax-cut revolution. In the heyday of that revolution, the 1980s and 1990s, economic growth was massive, investments returned at exceptionally high rates, and entrepreneurialism came into its greatest season in the sun.

Somehow, surely, given the importance of the personages, word got out about the Laffer curve meeting, and the markets, in their remarkable pan-human powers of apperception, digested that changes in the tax-rate cut direction were bound to happen. This is when top progressive tax rates were at 70 percent, and ever more income and corporate revenue was subject to such high rates on account of inflation (the tax code was not indexed for inflation, running as it was at that time at 10 percent per year). The information was credible: the Laffer curve was destined to lead a forthcoming tax-cut and, thereby, an economic-growth revolution. When Laffer put it on napkin after the dismal December 6 close, and the meeting participants disbanded thereafter to their own haunts, information permeated to the exchange by Monday, and up for good went stocks.

It was a great day to buy. As Laffer’s students Roger G. Ibbotson and Rex A. Sinquefield showed several years later in Stocks, Bonds, Bills, and Inflation, small stocks went on an unbelievable tear over the next few years, basically up fivefold. The broader market followed with Ronald Reagan in the 1980s. The first tax-rate cut came in 1978, a cut in the capital gains rate, and then Reagan and Jack Kemp in Congress took care of bringing the 70 percent rate down to 28 percent, among other tax-rate-cut achievements. The Laffer curve was a constant point of reference as this policy unfolded, inflation collapsed, and growth took off.

What evidence do we have that the Laffer curve napkin happened this very evening, fifty years ago? Jude Wanniski always said it was in the wake of the Republican rout in the November 1974 elections, and he started writing in the Journal about the relationship between tax rates and tax revenues the next week, that of Monday, December 9, 1974. Other evidence, not so credible, has the curve being drawn in September 1974 or in 1975. The clincher is that the market bottomed on December 6, 1974. It knew something was up, that a genie was out of the bottle, just then. Au revoir, Louis Rukeyser.