by Archie M. Richards, Jr., CFP^®
July 9, 2001

After the panic selling last March, stock prices rallied nicely. But unfavorable earnings and economic news have temporarily induced declines.

Don't despair. Today's bad news was anticipated by the lows four months ago. Today's news is old news. Don't fall prey to it. New price lows are unlikely.

Merrill Lynch is spending $25 million on advertisements advising investors to diversify to bonds. This is as reliable a signal as you'll find that stock prices will go up.

Let's review the causes of the troublesome market we've suffered over the past eighteen months:

Beginning in early-1999, the Federal Reserve became concerned that the economy was growing too rapidly, stock prices were rising too fast, and people were becoming too wealthy. (We should be so lucky as to suffer nothing but such disasters!) Foolishly, the Fed started raising interest rates.

But it raised them mincingly, a quarter-point at a time. The Fed let it be known that as long as the economy continued to grow rapidly, it would continue lifting the rates. People reacted rationally. They borrowed and bought things immediately, rather than wait until rates rose further. For almost two years, the Fed and the economy chased each other skyward. Finally, toward the end of 2000, the Fed announced that rates would be raised no further. The economy screeched to a halt.

The Fed is now lowering the rates more quickly than it raised them - an improvement, but still not good enough. It has failed to announce that the reductions have ended. People therefore postpone borrowing and buying, in hopes of borrowing more cheaply later. If the Federal Reserve announced that rates would be cut no further, the economy would undoubtedly spring to life.

Another reason for the stock market's weakness was the prosecution of Microsoft. Antitrust is hurtful law. Non-government monopolies arise naturally when the public is served particularly well. Antitrust is invariably applied to protect weaker competitors. Microsoft is far from angelic, I realize, but immorality is no crime. Other innovators felt they'd better not enjoy too much success. They throttled down, lest the government climb all over their backs.

A third reason for the market decline has been government's failure to permit the broadband to reach consumers. To protect the baby bells from wireless and fiberoptic competition, legislators and the FCC have dragged their feet about allowing the last mile of connection to be completed.

Corporate executives remain pessimistic. Maybe their views are justified - I don't know. But the corporate frame of reference is generally short. Executives must decide what the public wants to buy in the next six months to a year, enabling the company to gear up now. Consistent accuracy with such short-term forecasts deserves very good pay indeed.

But you needn't trouble yourself with short-term predictions. During the next couple of decades, barring natural disasters or terrorism, the prospects for the stock market are glorious. Here's why:

The Federal Reserve seems aware that it should adjust interest rates quickly. This is at least an improvement.

Secondly, technology is gaining at an ever-increasing speed. The greater the accumulation of scientific knowledge, the faster it progresses. Within fifteen years or so, robots should be conducting independent research on their own, multiplying the sum of knowledge all the faster. Lifestyle changes will be revolutionary, and the stock market will rise apace.

A third reason for optimism is the changing attitudes about big government. Among individual tax returns filed in 2000, for example, only 12 percent authorized $3 for presidential election campaigns. This was down from 29 percent in the late-1970s.

More tellingly, recent elections have favored the reduction of government in Mexico , Italy , British Columbia , Japan , Peru , Los Angeles 's mayorality election, Virginia 's special Congressional election, and New Jersey 's gubernatorial primary. Despite heavy campaign spending, the parties favoring bigger government lost.

Government has four essential roles: national defense, protection of private property, enforcement of contracts, and preventing people from harming others by force or fraud. U.S. governments have performed these tasks well. The economy has done well accordingly.

But the other government policies - oh my, so many of them - have in the long run done more harm than good. Without those, the U.S. economy would have grown considerably faster, with a narrower gap between rich and poor.

More and more voters sense these things. Oh yes, each person wants smaller government except for the specific programs that benefit him. But eventually, even this attitude will give way. Big changes approach, worldwide. The world's stock markets will take flight.