`SO far so good." That's the message of United States financial markets regarding the nation's new president.
Both stock and bond markets appear to be on a "steady course," despite the changeover from a Republican to Democratic White House, says Arnold Kaufman, editor of "The Outlook," a financial review published by Standard & Poor's Corporation. "The US bond market is acting well because there is a growing perception that Mr. Clinton will act in a reasonable manner" regarding fiscal initiatives to stimulate the economy.
The equities market is positioned for slow and steady gains, based on a slight easing in US economic activity since the period around Christmas, when consumers "were very generous in their use of credit," Mr. Kaufman says. The modesty of the upturn is good news for investors. They have been concerned that the economy might overheat and push up interest rates and eventually send the economy back into a downturn.
The financial community has been particularly focused on the bond market because of the new administration's avowed commitment to measures to stimulate the economy, including spending to rebuild roads, bridges, and other public facilities.
Bond investors have been worried that President Clinton might push up the deficit, boost interest rates, and thus depress bond prices. But bond traders now figure that the modest $20 billion-or-less stimulus package being talked about by the administration, as well as low inflation and continued slow economic growth, should ensure stable bond prices. Bond prices move in the opposite direction from interest rates.
Rates on 30-year US Treasury bonds closed the fourth quarter of 1992 at 7.39 percent, virtually unchanged from the third quarter, notes Edward Labenski Jr., a bond analyst with IDS Advisory Group Inc. Last week, yields on 30-year bonds were running around 7.30 percent.
Many fixed-income analysts say that, although short-term interest rates may not move much in the next few months, long-term rates may come down a tad. "The long bond will drop slightly," especially if German interest rates fall later this year as expected, predicts David Wyss, an economist with DRI/McGraw-Hill, economic consultants in Lexington, Mass. Lower long-term rates, he says, would boost the economy through more home sales and mortgage refinancings.
One gauge of the future course of interest rates and the bond market, Mr. Wyss says, will be what happens at the quarterly refunding by the US Treasury in the first week of February. The administration has hinted that it might reduce the number of 30-year bonds offered for sale. If so, that drop in supply could help shore up bond prices.
Meantime, the stock market continues to post generally steady gains. There are currently "three quite distinct stock markets in terms of market activity," Kaufman says. The Dow Jones industrial average, which monitors the nation's largest blue-chip companies, is barely posting growth; the S&P 500 index, which tracks the 500 largest industrial companies, is growing slightly faster; the "secondary" market of small to medium-size companies has been booming. The Nasdaq index of over-the-counter listings has gained almost 25 percent since October. Much of the propulsion in small-stock prices has come from investor perceptions that the Clinton White House will be beneficial to companies linked to infrastructure projects, high technology, or health-care reform.
Kaufman finds the euphoria about small stocks unsettling. "In recent weeks trading volume for Nasdaq and for the New York Stock Exchange has been running about the same. But if Nasdaq volume gets slightly higher than that of the Exchange - and stays there for about a week - that would clearly indicate a stock market getting very frothy." And that could foster a sell-off in small stocks as traders take profits, he says.