Confidence Up Markets Down

March 31, 1994

If there is one thing Wall Street can't stand that's worse than bad news, it is good news. Latest Conference Board reports that consumer confidence has surged to a four-year high helped send stock and bond prices tumbling this week to lows 8 percent under their Jan. 31 peak. The reason: Fears of inflation and a consensus that the Federal Reserve Board will keep increasing short-term interest rates to stop it at the pass.

That, at least, is one explanation for the market's jittery performance. It makes more sense to us than the more common assertion that the Fed's quarter-point boosts in short-term rates in February and March, with promise of more to come, set off the tailspin. The Fed's theory was that a "preventive strike" was needed to keep inflation in check. That long-term rates also have risen, despite the Fed's best efforts to drive them lower, may be because the Fed was too cautious or the world too tumultuous.

Consider all the red meat on which Wall Street bears can chew: Japan and the U.S. at loggerheads on trade; a deadline approaching for the imposition of ill-conceived trade sanctions on China; North Korea rattling its incipient nuclear arsenal; South Africa on the verge of civil war; Russia's economy in a swamp and Ukraine even worse; Mexico in turmoil after the assassination of its president-apparent; Whitewater corroding the White House; shrinking defense budgets imploding the weapons industry, and Tax Day April 15 putting an unprecedented bite on high-income investors.

This would be a witch's brew for any gamble on the future, which is what financial markets are all about. The more uncertainty, the less incentive there is to invest. Much has been made in this country of the Dow Jones flirtation with the 4000 mark before it dropped below 3700 this week. While Wall Street's 4000 peak marked a sizable 10 percent gain for 1993, markets overseas jumped two and three times higher. Since the beginning of the year, however, foreign markets have wobbled, limiting severely the number of "safe havens" available to investors.

Where we go from here is more for the crystal balls of market gurus than for economic policy makers. Bearish forecasts of another 200 point drop in the Dow have to be set against the widespread expectation that first-quarter earnings will be bullish indeed.

No doubt the Fed will be under pressure to hold off nudging short-term rates higher. But Fed chairman Alan Greenspan figures it is his responsibility to stifle inflation before it happens and thus give the economy a firm underpinning for long-term steady growth. We agree.

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