Wall St. worries over effects of Clinton's taxes

ANDREW LECKEY

March 03, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

"Never let 'em see you sweat" is an appropriate investment strategy for the volatile 1990s.

Wall Street, however, has already acknowledged that President Clinton is capable of increasing its perspiration level dramatically.

Investors should expect this white-knuckle flight to continue as economic reforms evolve into their final form. A market correction is possible at any unexpected turn if Wall Street suddenly becomes unnerved.

The worries are clear.

The investment community bemoans the fact that proposed government spending cuts seem to pale in comparison with suggested tax increases, especially those on corporations. Middle-class tax boosts might squelch consumer spending. Upper-class taxation will likely be much greater than initially anticipated.

Furthermore, tough Clinton talk about the need to rein in the drug industry has sent these once high-and-mighty stocks into a free fall.

The positive implications of the economic plan, however, are also apparent.

Lower long-term interest rates, with Federal Reserve Chairman Alan Greenspan offering his help in a pinch, could offset many current worries. Greenspan, who sat beaming between Hillary Clinton and Tipper Gore during the president's State of the Union address, has been won over by Clinton's program to systematically cut the federal deficit. He has promised to do his part.

Wall Street, which hates uncertainty, is faced with a great deal of it.

"Any time a stock market is historically high and has discounted earnings prospects, a correction can occur at any time," warns Michael Sherman, chief investment strategist for Shearson Lehman Brothers, who sees the Dow Jones industrial average at 3400 this year. "The investor should look carefully at the long-term bond rate, for, if it continues to move downward, stocks will be OK."

Ongoing market doldrums remain a real possibility.

"I'm not worried about correction so much as I am the duration of a correction," says Michael Metz, chief investment strategist for Oppenheimer & Co., who expects the Dow to do little for six or seven months, then start a move in late fall toward the 3600 level. "A potential correction could drop the Dow to the 3150 level, but, in general, I expect the market to actually be less volatile this year."

Of course, no government proposal ever winds up exactly as presented.

"Republicans and some Democrats will put together a coalition to try to modify some parts of Clinton's plan, perhaps to make increases in corporate taxes come more slowly and to avoid an increase in taxes of the middle class," predicts Byron Wien, U.S. investment strategist for Morgan Stanley & Co., who sees the Dow moving toward the 3500 level in 1993. As for defense spending cuts, "I expect to see them all."

Metz recommends a cautious portfolio of 60 percent cash, 20 percent stocks and 20 percent bonds for several months. He expects little upward momentum for most stocks, so stock-picking within favored groups is crucial.

Pharmaceutical companies are bargain-priced, in his opinion, and he recommends Bristol-Myers Squibb, Johnson & Johnson and Abbott Laboratories. In technology, Metz picks Motorola Inc. and SynOptics Communications as winners, while in gold-mining, he likes Homestake Mining.

Wien suggests a portfolio that is 50 percent stocks, 40 percent bonds and the rest cash. He predicts inflation will be about 3 percent this year and long-term Treasuries will be less than 7 percent.

A wide range of cyclical stocks should benefit, he believes. Favored are Intel Corp. in semiconductors, Union Camp in papers, Rohm & Hass in chemicals, Ford Motor Co. in automotive, Consolidated Rail in railroads, Phelps Dodge in nonferrous metals, American International Group in insurance and Citicorp in banking.

Sherman, who wants Ross Perot-type controls on spending, currently likes a portfolio mix that's 50 percent stocks, 35 percent bonds and 15 percent cash.

Low interest rates will greatly benefit a group such as banking, with Chase Manhattan, BankAmerica Corp., Chemical Bank and NationsBank Corp. the best bets. In another favored field, insurance, he likes Aetna Life & Casualty, CIGNA Corp., Travelers Corp., St. Paul Cos., Kemper Corp. and Equitable Co.

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