Why the Optimists Will Win Out in the Long Run

If you’re investing for the Clinton years, by all means do so with the expectation of better days ahead--although you might want to reckon on a second term to fully see the good times roll.

The outlook for the new President’s term, which begins Wednesday, is for short-term austerity and long-term prosperity.

Stock market newsletters these days have no trouble predicting the Dow Jones industrial average at 7,000--double the present level--for the year 2,000. And some economists and financial experts say confidently that waves of investment will usher in a new industrial era in this decade. But they’re uncertain about the immediate future.

Clinton comes to office in the wake of sobering testimony to Congress, by his nominees for Treasury and budget posts, that reducing the federal deficit will demand sacrifices from all. Changes in Social Security and Medicare were cited in particular.

That’s significant. It means that the new President and his advisers find the economy strong enough now that it doesn’t need a lift from government spending. Rather, Clinton seems bent on starting his Presidency with actions to reduce the $300-billion-a-year federal deficit. Any such actions will affect fiscal 1994, which begins Oct. 1.

Meanwhile, the deficit is sure to come down in 1993 because of higher income tax withholding--the reverse of President Bush’s tax deferral gimmick last year--and sharp reductions in defense spending. “There could be a swing of $40 billion out of the consumer economy,” and more than double that if cuts by state and local governments are counted, says economist David Levy, of the Levy Economics Institute at Bard College in Chappaqua, N.Y.

Running a deficit, lest we forget, is like kiting a check--it allows a little extra for defense payrolls, for welfare and medical care payments, until times turn up. But voters have indicated they’re against further check kiting. So the deficit will come down.

In the broader sense, voter attitudes reflect a more sober, less indulgent decade. Most people know by now that jobs are seldom for life, and that you have to save for your own retirement. But those trends in the ‘90s can be more positive than negative.

A reduced deficit ensures low inflation--so your savings won’t be eroded--and a pattern of low and stable interest rates that will encourage investment, the true engine of job creation and long-term prosperity.

Business investment in computing and telecommunications is already rising, and bound to increase mightily through the decade as those technologies develop. Also, the ‘90s will see massive investments to make industry and transportation environmentally sound.

“The great economist Joseph Schumpeter would recognize this as a time of industrial innovation and diffusion of new technology,” says Charles R. Morris, an investment banker who three years ago wrote a book titled “The Coming Global Boom.” Asked today why the boom hasn’t materialized, Morris replies, “It took a bit longer, but it’s on track now.”

Many in the investment field now share his optimism--one reason for the stock market’s strength and the surge in such companies as Intel, Motorola, Microsoft and even the old standby, American Telephone & Telegraph.

Some see the decade defined by Clinton’s generation, the roughly 80 million baby boomers who now range in age from 30 to 46. They promise renewed growth in the U.S. savings rates, says economist Paul Boltz of the T. Rowe Price mutual fund firm. And high savings promise ample, low-cost capital to finance new business and to convert defense industry to commercial work.

Other investment managers note the potential of restructured, efficient U.S. companies in the global market. Tony Kreisel, manager of Putnam Growth and Income Fund, focuses on Caterpillar and Cooper Industries and on mid-sized machinery and auto supply firms. And Kreisel likes Chrysler, which has gone in a year from $11.50 a share to $36 last week.

He’s not alone in favoring the reborn auto maker. Peter Lynch, one time fund manager and now senior adviser to Fidelity Investments, also likes the stock on the strength of its new LH cars--which are being well received by aging baby boomers.

Such expert stock picks are interesting. However, most people are not confident professionals but fearful small investors with their money in certificates of deposit or money market mutual funds, where they believe there’s no risk.

But money market funds paying 3% won’t be good enough to help finance retirement--a necessity in the years ahead because virtually all companies are moving to defined contribution pension plans, in which each employee must make his or her own investment decisions.

The challenge is to earn enough. Social Security will give you 25% to 35% of your pre- retirement income--but you’ll need at least 60% to live comfortably. You’ll have to earn the rest, and money funds won’t do it for you in a decade of low interest rates.

Nor are homes likely to appreciate into an effortless nest egg. In California and the Northeast, which boomed in the ‘80s, homes may not appreciate at all; elsewhere in the country price rises are likely to be moderate. Again, low inflation will mark the decade.

So your portfolio should be skewed toward common stocks and stock mutual funds. Over the last 60 years, common stocks have returned 11% a year on average.

There’s no guarantee they will do that in the ‘90s, of course. But that’s the way to bet because in the Clinton years we should have the wind at our back--after a stretch of rough water.