What a difference a summer makes. Wall Street, once firmly convinced that President Bush was marching toward certain re-election, has changed its tune. Financial pundits now realize that the presidential race probably will be close and that a win by Governor Clinton could hardly be termed a long shot.
Some investment firms are getting mentally prepared for a Clinton presidency, while others remain tentative about accepting that possibility.
"Our firm is now presuming a Clinton victory, because the economy is a handicap for President Bush that won't be changing by November," says Eric Miller, chief investment strategist for Donaldson Lufkin & Jenrette. "Last June, probably 80 percent of the people on Wall Street expected a Bush victory, but now I believe it's fairly evenly divided, with just slightly more expecting Clinton to win."
Anything Mr. Bush does now, whether involving specific economic programs or tensions with Iraq, will be construed as tied to the election, Mr. Miller says. On the other hand, since Mr. Clinton was really "put through the mill" early on, it's doubtful he will stumble by election time. Still, not all agree that Mr. Clinton can win.
"Although Wall Street confidence in a Bush victory has declined, I still think there's a belief he will eke out the election," says Steve Einhorn, chief investment strategist for Goldman Sachs. "However, if in October it looks likely that Clinton will win, I would expect a modest correction in the stock market of 3 to 5 percent."
That market decline, Mr. Einhorn contends, would be due to uncertainty about a Clinton presidency. Concerns include Mr. Clinton's potential choices for Federal Reserve chairman and Treasury secretary, as well as what would surface as specific policies on capital gains and other issues.
"Wall Street is indeed moving toward accepting the likelihood the November election will be extremely close, with a Clinton presidency possible," says Charles Clough, chief investment strategist for Merrill Lynch & Co. "This election, like those going on in Europe, is primarily about the philosophy of deflation."
Basically, the Republicans believe the natural forces of the economy will take care of themselves, while the Democrats believe its tendencies can be overcome through government involvement and the spending of some money, Mr. Clough says. He notes the current Democratic manifesto includes price controls on pharmaceuticals and casualty insurers. Some worry whether Mr. Clinton's spending policies would boost the budget deficit.
"No matter who is elected, 1993 will be a better year, with growth but no inflation, and the election may wind up as a non-event," Mr. Clough predicts.
Mr. Miller has 50 percent of his model portfolio in stocks, 40 percent bonds and the remainder cash. Mr. Einhorn has 70 percent in stocks, 25 percent bonds and the rest cash. Mr. Clough is 55 percent stocks, 35 percent in bonds and the rest cash, soon to be put into stocks.
"Due in part to election uncertainty, the market will be constrained and have trouble sustaining broad momentum through the remainder of this year," says Mr. Miller. "But, there's little downward risk either."
Bank stocks should prosper, among them Fleet National Group, Shawmut National, Bank of Boston, Chemical Bank and BankAmerica Corp., Mr. Miller says. Cyclical stocks in the automotive field are another emphasis, his favorites being Ford Motor and Federal-Mogul in bearings and transmissions. Prospects for insurance stocks, despite effects of Hurricane Andrew claims, look good. He prefers Chubb Corp. and Aon Corp.
"We're still in the bull market, with a recovery in corporate profits and stable-to-low interest rates," declares a confident Mr. Einhorn.
Growth stocks such as Philip Morris Cos., Pfizer Inc., Merck & Co., Microsoft Corp. and Sara Lee Corp. are top Einhorn choices. So are financial stocks such as Wells Fargo, Fannie Mae and Exel Ltd.
"The biggest stock market problem, and the biggest source of frustration to us, is the current lack of investment themes," says Mr. Clough. "I think the Dow Jones industrial average may establish a low in the next month and then finish the year higher."
Mr. Clough's stock picks include non-California thrifts such as Standard Federal Bank of Michigan, nursing homes such as Health Care & Retirement, and truckers such as Roadway Services.