The wounded bull Influences: President Clinton and Monica Lewinsky together may have less impact on the market than one man at the Federal Reserve.

September 11, 1998|By William Patalon III | William Patalon III,SUN STAFF Staff writer Bill Atkinson contributed to this article.

In the best of times -- unwarranted or not -- the U.S. president often finds himself getting credit for an economic boom or being made the scapegoat for recessions that lead to falling stock prices and lost jobs.

It's not that the president is irrelevant to the nation's economic fortunes: His administration crafts the budget, which helps set taxes and determines whether the nation will run a surplus or a deficit.

But it's the Federal Reserve that sets monetary policy -- interest rates -- which decides how much money is available to flow through the economy. Higher rates tighten the money supply, make borrowing more difficult, and can ratchet the country into recession. Lower rates boost the money supply and can lead to the kind of boom this country has enjoyed since 1991.

What's more, there's no longer just the U.S. economy to consider. We truly enjoy a world market, where the good or bad fortunes of one region can spill into another.

For that reason, many economists say that blaming yesterday's 249.48-point drop in the Dow Jones industrials on the potential for impeachment now facing President Clinton is an incredible oversimplification. After all, the sex scandal involving former White House intern Monica Lewinsky has been in the news since early this year and the possibility that the president obstructed justice by trying to cover up the affair is not new either.

"I don't think people woke up this morning and said: 'Geez, the president's in trouble, I think I'll sell stocks,' " said Genio Staranezak, director of long-term forecasting for the WEFA Group, a forecasting firm based near Philadelphia.

Just as presidents are often credited or blamed for boom times or recessions, so too are they ascribed as the cause of rising or falling stock prices. Too often, however, the credit or criticism is unjustified. For instance, the Watergate crisis and President Richard M. Nixon were often blamed for the 1973-1974 bear market that clipped 43.6 percent off the Standard & Poor's 500 index. But the real cause was the Arab oil embargo, double-digit inflation and a tightening of credit used to combat the dangerous rise in the general level of prices. The result was a 16-month recession that started in November 1973.

At a time when investors are praying that the 18.4 percent drop in stock prices since July is merely a "correction" -- and not a full-fanged bear market -- they are once again looking for a simple cause for the demise of the longest-running and most-profitable bull market in stocks the nation has ever seen.

There isn't one.

While the Dow's fall leaves it short of the 20 percent drop that would technically qualify as a bear market, indexes that track the stocks of smaller companies are suffering even more.

The possible causes are legion. Japan's banking sector is a disaster and much of emerging Asia is in a recession -- if not an outright depression. Once-mighty Russia is a mess fiscally and politically and is likely returning to hard-liner control. Parts of Latin America are an economic wreck.

And, thanks to a series of factors that include earnings disappointments by the big companies long seen as safe investment havens, the U.S. stock market has tanked, taking down the value of consumers' savings and retirement accounts -- and maybe with it, consumer confidence.

In a curious paradox, Clinton's problems are part of the mix, too. When it comes to the U.S. economy, Federal Reserve Chairman Alan Greenspan can exert a much more direct -- and immediate -- impact than the president, either by altering interest rates or by issuing public pronouncements that can cause the U.S. stock market to climb or dive.

However, while Clinton may not be top dog -- economically speaking -- at home, his absence from the global stage threatens to deepen the world financial crisis because of a leadership vacuum that exists worldwide. It's not a role that Greenspan can assume: First, his chief focus has typically been the domestic economy; and, second, he is not an elected official and lacks the entree to the inner sanctum of world leaders that only the president enjoys.

This leadership vacuum could allow recession to spread, which would hurt the profits of U.S. exporters, and of domestic producers undercut by cheaper products imported from Asia. And, since profits determine stock prices, at least during the market's "rational" periods, that lack of leadership could end up sending U.S. stock prices lower.

"There's no one there," said Mark Eaker, professor of business administration at the University of Virginia's Darden Graduate School of Business Administration, and vice president of Sire Management Corp., a New York City group that invests in hedge funds.

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