Weighing the Costs of a Vote for Change
Rightly or wrongly, serious investors are generally stereotyped as card-carrying Republicans, and most are assumed to hold dear the Republican principles of lower taxes, smaller government and a strong U.S. military.
So it seems logical enough to assume that if the Democrats suffer a massive defeat at the polls on Nov. 8--perhaps losing majorities in both the House and Senate--Wall Street will be thrilled and markets will zoom.
Not so fast, though. Many big investors, while as angry with President Clinton as the general population seems to be, are doubtful that a Republican sweep of Congress would be a panacea for stock and bond markets.
In fact, there are reasons to worry that a Republican victory could aggravate the already devastated bond market in the near term--sending interest rates still higher--if the GOP’s insistence on a middle-class tax cut sparks fears of a fresh expansion of the federal budget deficit.
Moreover, even Clinton’s critics admit that his handling of the economy has been largely commendable, or at worst non-damaging, on balance.
Ironically, given that Clinton is a Democrat, controlling the federal deficit while presiding over a growing economy may turn out to be his greatest victory in his first two years in office.
John Williams, economist at Bankers Trust in New York, estimates that the federal deficit in the year ended last Sept. 30 was just under $200 billion, down from $255 billion in 1993 and the record $290 billion of 1992. In fiscal 1995, Williams sees the deficit tumbling to $175 billion.
With his package of spending cuts and tax increases in 1993, Clinton put deficit-reduction at the top of his economic agenda. He believed, correctly as it turned out, that if he cut the deficit long-term interest rates would drop, invigorating the economy.
The strategy worked all right, sending bond yields to 20-year lows by the fall of 1993 and bolstering the economy’s recovery.
But part of Clinton’s problem today is that his focus on the bond market’s needs may have worked too well. The economy has been growing briskly all year, so much so that the Federal Reserve Board has been raising short-term interest rates to slow things down and keep inflation in check.
Unfortunately for Clinton, the federal deficit is long forgotten. Now investors’ obsession is whether the economy is too strong, and how high interest rates may have to go to cool consumer and business spending.
Of course, the President doesn’t directly control the Fed, so it’s hardly fair of Wall Street to blame Clinton for higher short-term interest rates. If the question is simply whether Clinton’s policies so far have been good for the economy, the answer is yes, many big investors admit. Officially, after all, stocks are still in a bull market, even if bonds aren’t.
“I have to give Clinton good marks on the economy,” says William Gross, a principal at giant Pacific Investment Management in Newport Beach and a Republican.
In addition to the deficit-reduction plan, Gross notes, Clinton also pleasantly surprised Wall Street by focusing on concluding last year’s two major trade pacts, the North American Free Trade Agreement and the global General Agreement on Tariffs and Trade.
Then what, exactly, is the investment community’s problem with the President? As with the public at large, money managers have developed a nebulous but nagging distrust of Clinton that crowds out any constructive feelings about his policies.
Morgan White, a principal at Woodside Asset Management in Menlo Park, believes that Clinton’s grand plan for national health care reform soured Wall Street by threatening the creation of a huge new federal bureaucracy. That ran counter to Clinton’s campaign pledge that he represented a “new kind of Democrat,” White says.
“I think what (angered) Wall Street was Clinton’s thinking that the federal government could run health care better than the private sector,” White says.
Other big investors say they’re taking their cue from the dollar’s puzzling weakness this year, despite the economy’s strength. A sinking dollar suggests that foreign investors have no faith in Clinton, his critics argue, though they’re hard-pressed to show proof of that. In any case, as long as the dollar stays weak, foreign investors have no incentive to buy U.S. stocks and bonds, keeping a critical source of demand out of the picture.
For many veteran Wall Streeters, distaste for Clinton ultimately flows from his management technique, or lack thereof. A lot of investors “just don’t like his management style,” says Ralph Wanger, head of the Acorn stock fund in Chicago. “He is inconsistent, opportunistic, and he tells everybody what they want to hear. He just doesn’t prioritize well.”
But would the arrival of a GOP Congress provide some dramatically positive offset to Clinton’s weaknesses and bring buyers flocking back to bonds and stocks?
If the key plank in a GOP Congress’ platform is a tax cut--as proposed in the “Contract with America” pledges recently unveiled by leading Republicans--it’s conceivable that markets could become enthusiastic, some money pros say.
Pacific Investment’s Gross argues that “lower taxes historically have been a positive for any country’s currency,” by promising a healthier economy in the long run. If foreigners view the United States in that light, a tax-cut pledge could pump up the dollar and bring foreign capital flowing into U.S. stocks and bonds, he says.
But David Shulman, investment strategist at Salomon Bros. in New York, worries that the bond market will see things differently--that lower taxes will equal a rising federal budget deficit if Congress and the President can’t agree on deep spending cuts as well.
“The bond market may begin to worry about a tax-cut bill spinning out of control,” Shulman warns.
For some money managers, the most encouraging thing about a Republican victory in November would be the neutralizing of Clinton “big ideas” like health care reform. “The concern is that left to his own devices, he’d be a real problem” for the economy’s going forward, Shulman says. For the markets, gridlock isn’t a bad word.
Finally, there is a chance that voting for change will simply help investors feel better about the future, even if they aren’t sure exactly why they should. That could translate into at least a short-term rally in stocks and bonds post-election.
“People just get fed up and want a change,” says Jim Stack, publisher of the InvesTech market newsletter in Whitefish, Mont. Things could always get worse under Republican rule, but if people believe the status quo isn’t acceptable, change becomes less fearful an option, he says.
“They figure, ‘Without change, there’s no chance of it coming out better,’ ” Stack says.
