Wall St. jolted by Clinton message Dow's reaction: an 83-point plunge, worst in 15 months

February 17, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- Wall Street's post-election bubble finally burst yesterday as President Clinton's Monday night message of higher taxes triggered an 83-point rout of the Dow Jones industrial average.

The 2.4 percent drop -- to a close of 3,309.49 -- was Wall Street's equivalent of a case of cold feet before the big event. After weeks of flirtation, investors realized that Mr. Clinton's deficit-reduction strategy, which he is to outline tonight, could cut company earnings, slow consumer spending and stem the flow of capital that has buoyed the market in recent years.

"The market is concerned that people won't have as much money in their pockets as before," said Peggy Farley, chief executive officer of Amas Securities Inc.

Currency traders also reacted nervously, selling dollars and buying gold. The dollar dropped 2 pfennigs against the mark, to close in New York at 1.6330 marks. Gold prices rose $3.40, to close at $333.00 an ounce. This morning in Tokyo, the dollar opened sharply lower against the Japanese yen, and stock prices in Tokyo continued this week's decline.

Besides the 30-stock Dow index, the broader market also declined yesterday, with the S&P 500 off 2 percent and NASDAQ stocks sinking to their lowest level this year.

In his speech Monday night, Mr. Clinton backed off from a campaign pledge to spur the economy and cut the deficit without taxing the middle class. Further, he reiterated his plan to increase the tax burden on wealthy Americans and corporations.

Since the inauguration Jan. 20, the market had been generally higher, as traders were optimistic that Mr. Clinton could spur the economy without reigniting inflation. But as Mr. Clinton's plans leaked out last week, the market started to retreat, culminating in yesterday's rout.

When asked about the sell-off of 82.94 points, the White House said that the decline was only "a day-to-day fluctuation" and that the bond market was a more reliable indicator of reaction to the president's deficit plan.

Soon afterward, however, the bond market also started to plummet, until the White House outlined $100 billion in spending cuts over four years. Calmed by that announcement, the bond market closed only marginally lower, with the Treasury's 30-year bond off 9/32 point, as its yield rose to 7.14 percent, from 7.12 percent Friday.

The stock market, however, was not so easily placated. After dropping 60 points in the first hour after the 9:30 a.m. opening, the Dow rallied briefly before deflating an additional 20 points, for the largest single-day fall in 15 months.

"The country's been going through a lot of pain over the last three years," said Stephen Smith, executive vice president of Brandywine Asset Management Inc. "I never thought that one spurred the economy by raising taxes, but maybe I went to the wrong school."

Less money to spend would not only hurt consumer spending but would also cut off the flow of funds into the market. First-time stock buyers have poured into the market over the past few years through mutual funds, which had a net inflow of $80 billion last year.

"The market has been pumped up for the last three years," said Richard Fontaine, a Baltimore-based market analyst. "The problem is, they're running out of the means to do this. We've had a speculative bubble, and the signs are that it may be ending."

Mr. Fontaine said the market had been in a fit of irrational optimism as traders wanted to believe that Mr. Clinton could do it all -- deficit reduction and economic stimulus -- at no cost. At the first sign of trouble, he said, they jumped ship.

Others, however, said the market's reactions have been perfectly rational. Donald Straszheim, chief economist for Merrill Lynch & Co. Inc., said the market had been buoyed by strong economic news through January and much of February. Not only was the economy looking up, he said, but inflation seemed to be in check -- perfect conditions for stocks.

These conditions still exist, Mr. Straszheim said, but the market is concerned about the future. "There clearly was a fresh-start effect after he took over," Mr. Straszheim said. "That's surely been pierced now."

Especially noticeable among the big losers yesterday were stocks of drug companies, whose profits are expected to be limited under the administration's plan to cut health care costs. Transportation stocks were also off amid fears that a gas tax would drive up companies' energy bills and make driving and flying more expensive.

Not all the stock sell-offs were related to Mr. Clinton's plans. Computer stocks fell on a negative report by an analyst who follows Microsoft Corp. Other stocks fell because company earnings were lower than expected.

Among other market measures, which give a broader view of the stock market, the Standard & Poor's 500 index fell 10.65, to 433.93, the lowest close since Jan. 20. The American Stock Exchange Market Value index fell 9.66, to 405.81. The Dow Jones Transportation Average lost 63.46, or 4 percent, to 1,515.48. The NASDAQ Combined Composite index fell 25.15, or 3.6 percent, to 665.39, the lowest closing this year.

Declining common stocks outnumbered advancing issues by about 5-to-1 on the New York Stock Exchange. Trading was active, with 341 million shares changing hands.

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