For Wall Street, a Wounded Clinton Is a Bleak Scenario

Investors are worried about President Clinton’s fate for a single reason: They hate uncertainty of any kind, and the specter of possible impeachment represents uncertainty at its worst.

As Thursday’s deep market sell-off demonstrated, investors fear the U.S. will be unable to provide leadership at the precise moment the world economy needs it most. Even worse, investors don’t know whether to prepare for Clinton finishing his term and maintaining his economic programs or for a batch of newly emboldened Republicans and their ideas.

At the moment, investors are sure about only one thing: Whether Clinton keeps his job or not, they want this political furor to be done with quickly.

“What will become important to the market is not how it’s resolved, but how soon it’s resolved,” said Tom Gallagher, a political economist at Lehman Bros.

The irony of the Clinton crisis is that Wall Street has historically preferred Republicans--and their pro-business policies--to Democrats. But investors appreciate Clinton’s hands-off economic stance and many are happy with the countervailing forces of a Democrat in the White House and Republicans in control of Congress.

But more than anything, they shudder at the notion of protracted impeachment hearings that threaten to drag into next year.

“Having a wounded president holding on for a couple of months is really going to weigh on the market,” said Charles A. Gabriel, senior Washington analyst for Prudential Securities Inc. “The bigger risk from here is that you have a wounded Clinton staying on rather than being forced to resign.”

Until now, Wall Street had largely assumed that Clinton would survive the controversy. Investors also have downplayed Clinton’s travails because they’re generally more concerned with interest-rate policy, which is set by the Federal Reserve, than with day-to-day machinations in Washington.

But that changed Wednesday, when independent counsel Kenneth Starr delivered a report that his office described as containing “substantial and credible” evidence for a possible impeachment.

“Until Tuesday, it wasn’t a factor in the markets,” Gallagher said. “Investors knew the president had problems, but no one adjusted their portfolios to account for that. But the submission of the Starr report is an important market event because markets don’t like uncertainty.”

The possibility that Clinton could resign or be impeached raises a jumble of emotions for investors.

His positions on free trade and deregulation have been warmly received.

What’s more, picking ex-Wall Streeter Robert Rubin as Treasury secretary and reappointing Alan Greenspan as head of the Fed won near-unanimous praise.

“The markets have loved Bill Clinton,” Gabriel said.

As George Benston, a finance professor at Emory University’s business school, put it: “Clinton has been the best Republican president we’ve had in some time.”

Some investors also are worried the GOP might gain too much strength amid Clinton’s troubles.

For example, some Republicans are agitating for tax cuts. But Wall Street has been lukewarm because investors fear it would eat into the government’s recently achieved budget surplus. They also worry about increased defense spending further chipping away at the surplus.

“I tell my clients, who are mostly conservative, to be careful what they wish for,” said Greg Valliere, chief political analyst at Charles Schwab Corp.

Other experts fear the biggest short-term danger is liberal Democrats gaining extra clout. Their reasoning: Clinton badly needs Democratic backing to stay in power and may give in to costly pet projects to garner support.

However, there is some good news for investors. Greenspan and Rubin are firmly in control of the domestic economy and unlikely to give up the reins any time soon. Greenspan’s term runs until the summer of 2000 and Rubin--though some experts believe he’d like to leave office--is being forced to stay because of the current global economic turmoil.

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Clinton’s impact on the market has brought vague parallels to the Watergate scandal. In each case, a president’s political woes came on top of a laundry list of economic problems.

In 1973 and 1974, however, the economy and stock market were far more troubled. Today, the U.S. economy remains resilient despite problems overseas, and Wall Streeters disagree about whether a bear market is underway.

President Nixon’s resignation resulted in a stream of liberal Democrats being elected to Congress, Valliere said. This time around, Republicans are expected to prevail in November’s congressional election.

If the Clinton controversy lingers, one striking similarity might emerge.

“We expect our political leaders to be strong when things are going wrong and to lead us to solutions,” said Richard Sylla, a business historian at the Stern business school at New York University.

“But if the leader himself is wounded and weak, that leads people to say, ‘He can’t help us with our problems,’ [and investors react by] selling stock. That’s an analogy that probably holds today.”