Clinton’s Promise of Growth Likely to Benefit Stocks
It may not sound quite right for a Democratic President, but Bill Clinton’s victory will probably mean the rich will get richer--if they’re in the stock market, that is.
If you own bonds, the story isn’t so bright. But you may still be better off holding bonds--and even buying more in the next few months--rather than selling out now.
Wall Street understands that the key to Clinton’s ascendance was his promise of a faster-growing economy. Because that’s what Americans want, Clinton will have to deliver, analysts figure.
” Clinton is going to ensure economic growth,” Byron Wien, investment strategist at Morgan Stanley & Co. in New York, says flatly.
Just how he’ll do that is unknown, probably even to him. But for the markets, the mere expectation of better growth is likely to guarantee a stock rally in coming weeks and months, as investors grow more confident about rising corporate profits in 1993.
At the same time, interest rates could continue to edge higher on concerns that faster economic growth will mean ever-larger federal borrowing and higher inflation. Ultimately, however, Wall Street expects most of the bond market’s worries to prove overblown.
Here’s a look at how some big investors are placing their bets under President-elect Clinton:
The right stocks to own: Stay with the leaders, many experts advise. All year, Wall Street has viewed a potential Clinton win as particularly favorable for a handful of industries: engineering firms, such as Fluor and Jacobs Engineering, because Clinton wants to pump more money into rebuilding the nation’s infrastructure; technology companies, because Clinton supports capital spending incentives, and health maintenance organizations, because Clinton’s national health plan favors managed-care companies.
Many stocks in those groups have rocketed this year partly in anticipation of a Clinton win. Others, however, jumped up and have since fallen back. “The natural tendency is to assume the market has discounted a Clinton victory, but I don’t think that’s the case,” Wien says.
Figure it this way: The substantial number of investors who doubted Clinton’s chances--and stayed out of the market--now will be pressured to get back in. Even if they don’t like Clinton, they won’t be above trying to make money off him. Investors’ cash levels are very high.
Wien favors such technology stocks as Allied Signal and Intel, estimating that “a little sales growth can go a long way” toward boosting their earnings next year.
Bill D’Alonzo, manager of the Brandywine stock mutual fund in Wilmington, Del., figures a stronger economy will mean more business for already booming computer-networking firms such as Cabletron Systems. He also favors Marshall Industries, a Los Angeles-based distributor of electronic parts, as a continuing play on a healthier business climate.
If you want to play the expected rise in American consumers’ confidence as the economic outlook brightens, major retail stocks such as Penney, Wal-Mart and Dayton Hudson would be natural picks, some advisers say.
Potential stock casualties: Major drug stocks have been hammered this year on worries that Clinton would slice into their handsome profit growth with limits on drug pricing. Whether that will actually happen still isn’t clear, but many Wall Streeters believe that the psychological impact of his victory could well cause renewed selling of drug issues--despite their relatively cheap prices compared to earnings.
A dissenter, however, is Martin Sass of M.D. Sass Investors in New York. He’d buy Merck and Pfizer, he says, because “these are two companies that aren’t dependent on pricing ability but on new product introductions”--and both have plenty of new drugs in the pipeline, he adds.
William Dodge, investment strategist at Dean Witter Reynolds, warns that the big 1992 rally in bank stocks may be over, if you assume economic growth will speed up. Even a slight uptick in short-term interest rates with a recovery will cause bank profit margins to narrow, he says. “I think the banks are going to have a tougher time of it.”
Likewise, the expectation of better growth could short-circuit investors’ love affair with electric utilities, at least temporarily. In a strong economy, investors typically abandon safe stocks such as utilities in favor of companies whose profits are poised to rocket.
What’s next for bonds: Interest rates have been rising since late September, apparently anticipating Clinton’s victory. Many investors who equate Democrats with big spending programs understandably view Clinton with great suspicion. They figure he’s sure to push up federal spending and inflation, inevitably leading to higher interest rates.
But for now, most economists just don’t buy that. First, the slow global economy will limit inflation and how fast the U.S. economy can grow. (Europe, after all, is in terrible shape, and Japan is stumbling.) Second, bond investors will be Clinton’s invisible policeman: If he attempts to blow up the federal deficit to new heights, long-term interest rates will run up so fast that economic growth will all but shut down--which will quickly lead to lower rates again.
The 30-year Treasury bond yield now is 7.66%, up from 7.35% a month ago. Donald Straszheim, economist at Merrill Lynch & Co., figures that it would only take a rise in the yield on that bellwether bond to the 8%-8.5% range before “the economy would begin to suffer, and suffer greatly,” as mortgage rates rise in tandem and consumer and business confidence slides.
William Gross, bond chief at Pacific Investment Management in Newport Beach, agrees that interest rates can’t rise much without causing the economy great harm. And he believes Clinton knows that, and so won’t propose an economic-stimulus package that would rile the bond market.
In the next few weeks, however, worried investors may well panic and sell bonds. If rates do rise, Gross says, “I’d be a buyer.” Even at the current yield of 7.66% on long Treasury bonds, Gross says, “That’s a decent return relative to a 2% to 3% inflation rate.”
As for short-term interest rates, Straszheim doubts that they can move up much more, because the Federal Reserve is holding those reins. If you’re expecting substantially higher bank savings certificate yields soon, you’ll be disappointed.
But keep your eye on Clinton’s camp just the same, Straszheim says: If they decide to go for broke on the economy, higher interest rates by spring of ’93 could be on the horizon.
Higher Interest Rates? Be Wary of These Signals
Wall Street’s great fear about Bill Clinton is that he will attempt to boost government spending so sharply that he will send interest rates soaring--slamming bond investors. Many experts do not buy that scenario. But Donald Straszheim, economist at Merrill Lynch, says it will be time to sell bonds if you start to see these warning signals from the Clinton camp in the next few months:
Clear talk of an economic “quick-fix” rather than long-term solutions to the nation’s problems.
Downplaying of the threat posed by the huge federal budget deficit.
Unrealistic economic growth assumptions in the first real Clinton budget (due in late January).
Use of gimmicks in the Clinton budget to artificially lower the projected deficit.
Fast post-election pledges of higher aid (than already promised) for traditional Democratic constituencies.
A focus by Clinton advisers on reforming the “budget process” rather than on making real progress in reordering spending priorities.
Source: Merrill Lynch
‘Clinton Stocks’?
A Clinton Administration is expected to mean faster economic growth and thus better profits for a wide range of industrial companies. Here are some analysts’ favorites--and how their stocks have fared so far this year.
Tues. 1992 Stock close gain Motorola 96 1/2 +48% Marshall Industries 38 1/2 +48% Nucor 62 1/8 +39% Intel 67 1/4 +37% Allied Signal 56 7/8 +30% Cabletron Systems 68 7/8 +28% Cummins Engine 69 1/8 +27% Foster Wheeler 32 1/4 +22% Jacobs Engineering 29 3/4 +10% Fluor 45 +3% Conrail 43 1/2 +3% Wheelabrator Tech. 35 1/2 +3% Granite Const. 23 1/4 -15% Morrison Knudsen 21 1/8 -15% S&P; 500 index 419.92 +1%
All stocks trade on NYSE except Intel and Granite (NASDAQ).
