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Deficit Accord Is Not Enough to Rally Business Community

Times Staff Writer

To investors on Wall Street and other financial markets, the long-awaited budget deficit accord should have been cause for celebration. Instead, it was cause for one big collective yawn.

The stock, bond and currency markets greeted the new plan on Monday--the first full day of trading since the agreement was announced Friday afternoon--with indifference. The Dow Jones industrial average plodded to a mere 9.45-point gain, on its weakest volume since the Oct. 19 crash, while bonds and the dollar--which were also supposed to be helped by the accord--tumbled in dull trading Monday.

The muted response reflected, analysts said, disappointment that the plan to cut the deficit by $76 billion over two years did not go deeper and further. It also reflected a wait-and-see attitude about whether the accord would lead West Germany and Japan to cut their interest rates. And investors were still worried about the U.S. trade deficit, the falling dollar, a possible recession and other economic uncertainties.

“It was really a non-event,” Jon Groveman, head of equity trading for the New York securities firm of Ladenburg, Thalmann & Co., said of the deficit accord’s reception Monday on Wall Street. “You don’t influence something that was meaningful and dramatic (the stock market crash) with something that’s not meaningful and dramatic. You need real cuts.”

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“While the bill is likely to pass, it’s not a highly regarded bill,” said Alan R. Ackerman, market strategist for the New York firm of Gruntal & Co. “The cuts were not deep enough.”

To be sure, analysts and traders noted that the plan, which is designed to cut $30 billion from the deficit in the current fiscal year, was a positive first step and that more may still be done to slash the deficit further.

The plan, Washington’s response to the upheaval caused by the stock crash, was meant to have a psychological effect on calming the markets as much as a real effect on reducing the deficit. The huge deficit puts upward pressure on interest rates and has weakened the dollar, two factors which lately have hurt stocks. Some analysts contend that the lack of action on cutting the deficit contributed to the market collapse in that it showed a lack of resolve in Washington.

“This at least sends a message, both domestically but more importantly abroad, that . . . the leadership in this country is willing to sit down and work on the agreement,” New York Stock Exchange President John J. Phelan said Monday in Washington.

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President Reagan, meeting with Phelan and about 10 other prominent business leaders, said the agreement “must not be the last word on deficit reduction. This is a good first step. We can and should do more.”

But despite the President’s assurances, enthusiasm on Wall Street waned Monday, reflecting in part a belief that investors had already discounted the effect of the agreement. Indeed, the stock market’s initial reaction in late Friday trading, just after the accord was announced, was to rise about 30 points then close with an 18.24-point gain for the day.

Reaction, however, was mixed in foreign markets, with London shares finishing sharply higher Monday while Hong Kong stocks tumbled. The all-important Tokyo market, the world’s largest, was closed Monday for Japan’s Thanksgiving holiday.

Wall Street analysts noted that the deficit plan does not go much beyond the $23 billion in cuts already mandated under the Gramm-Rudman law. They added that many of the cuts outlined in the plan would produce only one-time savings and that Congress and the Administration were not willing to make more serious, deeper cuts just before an election year.

“Gramm-Rudman would have gone into effect anyway, and there’s some question as to whether this (new plan) is any better,” said stock trader Groveman, noting that the plan calls for tax increases, a prospect that frightens some investors, given their fears of a possible recession.

Some also questioned whether the plan would make much of a dent in the deficit, still projected to total $150 billion in the current fiscal year, higher than the $148 billion deficit for fiscal 1987 ended Sept. 30. (The monthly deficit grew by more than 20% in October to $30.74 billion from $25.29 billion in October, 1986, the Treasury Department said Monday.)

Another cause of the muted reaction: The deficit-reduction plan still needs to be passed by Congress--an action that is not entirely assured. Congressional committees must still write the tax legislation and target specific items for spending cuts and tax increases. Congressional and White House negotiators wrangled for four weeks before reaching Friday’s accord, which is simply a blueprint for final legislation.

Peter G. Peterson, a Wall Street investment banker and former commerce secretary, said that if lawmakers “delay and diddle and daddle and come up with only marginalia,” it would send a bad signal to world markets. That, he said, would inevitably force interest rates higher, the market lower and “a loss of confidence in the dollar.”

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Other Concerns Cited

Significantly, even as Reagan was trying to rally support for the package Monday, he noted that the agreement doesn’t “preclude” him from vetoing legislation. “I will veto a bad tax bill,” he said.

Markets were also muted because investors were waiting to see what kind of action would come from foreign governments, which generally praised the accord. Many economists hope that a commitment by the United States to reduce its deficit would lead to Japan and West Germany cutting interest rates to stimulate their economies. Traders, however, were not encouraged Monday by signs that foreign investors were net sellers of U.S. stocks.

The deficit accord “was an OK agreement, but the real payoff is yet to come,” said Hugh Johnson, chief investment strategist with First Albany Co.

He and other analysts said they hoped that the accord would prompt the largest Western economic powers, known as the Group of Seven, to agree on new steps to lower interest rates worldwide and stabilize the U.S. dollar.

Experts also noted that the budget deficit was one of several things clouding the financial market outlook. Wall Streeters and others are particularly worried about the strength of Christmas spending by consumers, a critical sign of whether there will be a recession. They also are looking for further reductions in the bulging U.S. trade deficit.

“The budget deficit thing has been completely overblown from Day One,” said Peter J. Canelo, chief investment strategist at Bear, Stearns & Co. “It’s not been the only thing bothering the market. So a partial solution is not going to have much impact.”

Until a clearer picture emerges about the economy, interest rates and other factors, “we may have an unexciting stock market for a while,” not going very far up or down, said Charles I. Clough Jr., chief investment strategist for Merrill Lynch.

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Staff writer Karen Tumulty in Washington also contributed to this story.


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