Wall Street Doesn’t Seem Too Worried About the Budget
No surprise here: Mostly Republican Wall Street almost universally hates President Clinton’s tax-raising budget plan.
But is it really affecting investment pros’ attitude toward the stock market--or are they whining just because it’s the traditional Republican thing to do?
If you take the “efficient market” view, then Wall Street’s belief that the plan’s tax increases will sharply slow the economy should already be reflected in stock prices.
And if that’s the case, the market apparently isn’t terribly worried about what’s ahead: The Dow industrials are a mere 0.5% below their all-time high; and the NASDAQ composite index of mostly smaller stocks hit a record high Thursday.
Most money managers, however, contend that it is a mistake to judge the market indexes’ strength as a vote of confidence in the Clinton plan. Look below the surface, they say, and you can clearly see the casualties of the coming tax hikes.
Robert Bissell, senior vice president in Wells Fargo’s investment management unit in Los Angeles, argues that the anticipation of a heavier tax burden on consumers “reinforces an already negative view of the consumer-related stocks. . . . I think that whole side of the market could continue to act very, very poorly.”
Many consumer stocks--including drug, food, household product and apparel issues--have been trounced this year as weak consumer spending has forced once-impervious brand-name companies to sharply discount their products. Take away more of consumers’ spendable income via higher taxes, Bissell says, and the result could be another round of deep discounting in the brand-name sector.
David Dreman, head of Dreman Value Management in New York, says he isn’t adamantly opposed to tax hikes to help pare the federal deficit. But he views the Clinton plan as “ill-timed” given the weak economy. “This is going to do the opposite of what Clinton said he was going to do, which was to get the economy moving again,” Dreman says.
While he isn’t dumping stocks in advance of the further economic weakness he foresees, Dreman says the Clinton plan “has slowed down my intentions to buy some of the (deep) cyclical stocks, such as aluminum and chemical issues.” Their earnings usually don’t turn up until the global economy is booming. With a fresh slowdown expected in the United States, Dreman figures the next boom now is much farther over the horizon.
In San Diego, Charles Brandes of Brandes Investment Management is more openly negative about the Clinton plan than many of his peers. He sees a “big chance” that the end result of higher taxes will be another full-fledged recession in the United States--not just an economic slowdown.
His solution? “We’re moving overseas, buying a lot more in foreign equities than we would if we felt that the outlook for the U.S. economy was better,” Brandes says. His “global” portfolios were about 60% in U.S. stocks and 40% in foreign stocks last year; so far this year Brandes has cut the U.S. weighting to 40%.
If Bissell, Dreman and Brandes are typical, then much of Wall Street now is more concerned about what one shouldn’t own among U.S. stocks than what one should own. But with the market overall at or near its peak, clearly somebody still is buying stocks, Clinton plan or no Clinton plan.
What’s supporting stock prices? For one, there’s the widespread belief that if the economy slows, interest rates will fall again. That keeps many portfolio managers from selling stocks, even if they enjoy bashing Clinton’s programs.
Second, in a weak economy, the relative few companies that can produce heady earnings growth should command top stock prices. So many investment pros continue to throw money at the stocks they expect to outshine the market.
A slowing economy “is bad news for the country, but it’s good news for (stocks of) the companies I invest in, because they’re growing faster than the economy,” argues Michael DiCarlo, manager of the John Hancock Special Equities stock fund in Boston. His holdings include such names as retailers Office Depot and Ann Taylor, software firm Sybase and bike helmet maker Bell Sports.
Finally, listen to Jerry Dodson, manager of the Parnassus stock fund in San Francisco. Despite worries that the Clinton tax hikes will cause another recession--and a bear market--Dodson doesn’t see it. The corporate restructurings of the past few years suggest that many companies are prepared to pleasantly surprise investors with decent earnings, even in a sluggish economy, he says.
“Recessions and bear markets don’t happen when interest rates are low and when companies are operating very efficiently,” Dodson contends.
Clinton-Plan Victims?
Some Wall Streeters argue that consumer-related and economy-sensitive stocks are most vulnerable to harm from the Clinton deficit-cutting plan. Coincidentally, many of those groups were the market’s weakest areas in July.
Avg. percentage change: Group July ’93 thru July Computer systems -12.1% -15.6% Apparel makers -11.8% -26.9% Electronic instrum. -11.3% +1.8% Steel -9.8% +6.4% Drugs -9.5% -20.9% Machine tools -9.3% -2.3% Apparel retailers -7.9% -20.3% Medical supplies -7.7% -26.4% Food producers -6.7% -17.7% Household products -6.6% -6.8% S&P; 500 index -0.5% +2.9%
Source: Smith Barney, Harris Upham & Co.
