Wall St. assesses Clinton's plan Ian Johnson

ECONOMY, BONDS PERK UP STOCKS ERRATIC

February 19, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- The financial community's mixed response to Bill Clinton's economic plan was highlighted again yesterday as stocks continued their erratic behavior and bonds embraced the president's plan to cut the budget deficit.

"The primary mood is uncertainty. You have people trying to place bets on what Clinton's plans will mean and what Congress will pass, without really knowing either," said Alan Snyder of Snyder Capital Management Inc.

The widely watched Dow Jones industrial average illustrated the stock market's worry, as it surged 36 points in the first half-hour of trading yesterday, plummeted 80 points and then finally finished off just 10 points to close at 3302.19. The S&P 500 index also closed down, dropping 1.4, to 431.90, but the broader market closed up, with winners outpacing losers by an 8-to-7 margin.

Over-the-counter stocks on the NASDAQ exchange also closed up 3.02, at 662.45, while the American Stock Exchange rose 0.92, to 402.28.

Although the market was hardly repeating its Tuesday performance, when the Dow skidded 83 points, it has yet to rally significantly since Mr. Clinton outlined his plan in a speech Monday night and then detailed it before Congress Wednesday.

Analysts said the market remains skittish because it worries that the taxes in Mr. Clinton's plan will drag down corporate earnings and siphon off investors' money, which has pumped up the market recently.

The biggest losers yesterday were again the health care, automobile, chemical and medical stocks that investors feel will be hurt by Mr. Clinton's plans to drive down health care costs and increase energy taxes.

Chrysler Corp. closed down 62.5 cents, at $37.875; Ford Motor Co. was down 37.5 cents, to $46.375, and General Motors Corp. closed down $1.125, at $38.50.

Also hit by yesterday's selling were providers of student loans, which could suffer under the administration's plan to lend money directly to students and have them pay it back through national service. Student Loan Marketing, or Sallie Mae, nose dived $9.375, to $47.25, while Student Loan Corp. fell $3.25, to $15.50.

While the stock market seemed to have cooled its earlier passion for Mr. Clinton, the bond market has continued to believe that he will cut the deficit. A lower deficit would help ease worries about inflation, which eats into the value of bonds. Smaller deficits also mean that the government would have to issue fewer bonds, which also drives up bond prices.

Some of the hottest bonds were tax-exempt municipal bonds, which are seen as a refuge from Mr. Clinton's promise to increase the tax rate on the upper class. The yield on some bonds plunged 10 basis points, as their attractiveness made the bonds more expensive.

A basis point is one-hundredth of a percentage point. The yield is the annualized return on an investment.

The performance of government bonds was even more dramatic, as the benchmark 30-year Treasury bond was up was up 21/32, pushing the yield down to 7.02 percent, the lowest since the government began selling 30-year bonds in 1977.

While few bond market observers thought that money was flowing out of stocks and into bonds, at least one Wall Street investment firm, Goldman, Sachs & Co. shifted weight in its model portfolio away from stocks and toward bonds.

Some analysts, however, thought the bond market's reaction to Mr. Clinton's plans did not signify confidence in the president -- in fact, just the opposite.

If the president's plan stalls the economy, that would suit the bond market fine, because low or no growth would also mean low or no inflation, said Wayne Wong, managing director of Marinvest Inc.

A TALE OF TWO MARKETS

Although the investment community seems to have contradictory and confusing attitudes toward President Clinton's economic plans, they aren't all that irrational.

The market that gets the most attention, the stock market, is also the most emotional. Stock dealers worry the plan will kill the fragile recovery by smothering it in higher taxes. This would hurt companies that issue stocks and thus drive down stock prices.

More complicated are the bond markets, which want Mr. Clinton to succeed in reducing the deficit but not in stimulating the economy too much. Too much of either -- deficit spending and excessive growth -- is bad news for current bondholders.

As the deficit grows, more bonds must be sold to service the debt, possibly reducing the allure of existing bonds. And if the economy expands too rapidly, such excessive growth would bring on higher rates of inflation and higher interest rates as well.

Higher interest rates are bad news for existing bonds, which typically carry fixed rates of interest. A $10,000 face-value bond paying 7 percent interest would no longer be worth that much if newly issued $10,000 bonds were paying 10 percent interest.

For now, the bond market seems to believe that Mr. Clinton will help them on both counts. His economic stimulus will not aggravate inflation and might, in fact, temper growth, thus dampening inflation even more. Indeed, bond traders think he will cut the deficit, which will help them further.

Neither of these conditions -- low inflation and slow growth -- help stock buyers much, so while stocks are relatively depressed, bond prices are rising.

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