Markets Can Still Cash In on Government Help

Tax cuts, government spending and highly accommodative monetary policy provided a potent cocktail of stimuli in 2003, boosting the economy and financial markets. It's unlikely that government policy will be in such full force in 2004, but that doesn't mean the stimulus bonanza is about to come to an end.

Like a parent helping a child learn to ride a bicycle without training wheels, the government will try to hang on and provide support for as long as possible before letting the economy ride solo.

"My feeling has always been this stimulus is about inflating our way out of a huge debt morass vs. real concern about deflation," said Bernie Schaeffer, chairman of Schaeffer's Investment Research in Cincinnati. "In that sense, as long as spigots can possibly be kept going, they will be."

Thanks, in part, to a heavy dose of stimuli, the past year was a blockbuster one for equities. The Nasdaq Composite is up 43.6% on the year (as of Dec. 12), on track for its third-best annual percentage gain since its debut in 1971. The Russell 2000 is up more than 40%, while the Dow Jones Industrial Average and S&P 500 are each up about 20%.

Of course, those heady gains followed devastating down years in 2000, 2001 and 2002. On some level, major indices may have enjoyed a solid 2003, if only for reflexive reasons. But it's fair to say actions by multiple arms of the federal government helped ensure that occurrence, or certainly helped facilitate larger-than-expected gains.

"Part of the reason [the economy] performed so well in the third quarter is that there's more stimulus in the pipeline today than there has been since World War II," Federal Reserve Governor Mark Olson said last month. "That stimulus is in part tax cut, in part tax rebates, in part deficit spending and a significant part an accommodative monetary policy."