THE eyes of official Washington will be on Wall Street this week. A good performance for stocks and bonds would be counted as a major plus for the White House, as it steps up its campaign to win approval for the new economic plan.
Despite initial skittishness early last week, the financial community seems to be reconciling itself to eventual enactment of most of President Clinton's plan. As Wall Street has taken a more measured look at the sweeping economic stimulus/deficit-reduction plan after details came out, it is finding parts of the program to like, including the release of billions of federal dollars to help rebuild the nation's infrastructure.
Financial markets were also heartened by Federal Reserve Board chairman Alan Greenspan's support for the package, and Mr. Greenspan's signal that the Fed would continue to support low interest rates.
Greenspan's supportive comments were made to the Senate Banking Committee on Friday. In part because of his reassurances, the Dow Jones industrial average closed at 3,322.18 points on Friday, up 19.99 points over the prior day. For the week, however, the Dow lost 70.25 points. That loss mainly reflected the turbulent trading last Tuesday, when investors began to realize the considerable tax increase in the Clinton package.
The bond market appears to be happily adjusting to the Clinton plan. Rates on 30-year Treasury bonds fell late last week, reaching 21-year lows. If the deficit comes down during the next few years, that would mean that Washington would not have to issue as many new bonds as had been estimated. Fewer new bonds help shore up the price of existing bonds, while keeping yields low.
"The most important point for investors is that the underlying economic fundamentals are now very sound," says William Meehan of Prudential Securities Inc. "Interest rates are low and going lower; there are no inflationary pressures; companies are replacing older and outdated technologies with newer, more sophisticated, but lower-cost technologies; and the economy is growing."
Mr. Clinton is "very sensititve to financial markets and Wall Street," Mr. Meehan says. "He is a consummate politician." The White House will take whatever steps are necessary during the months ahead to fine-tune the deficit-reduction plan to ensure that it does not lose the support of Wall Street, Meehan says.
"The upcoming tax hikes and the stimulus package will probably take a back seat in determining the [stock] market's outlook," says James Stack, who publishes InvesTech, an analytical newsletter.
"The primary factor that will be watched by the investment community will be the Federal Reserve Board's interest rate policy, as well as underlying fundamentals within the markets and the US economy," Mr. Stack says.
Last Tuesday's 83-point plunge on the Dow does not necessarily suggest a trend of market losses, Stack says. What's forgotten, he notes, is that the Dow tumbled 2 percent on the day that Ronald Reagan took office in January 1981 - the equivalent of 72 points on the Dow.
Stack says that the American public will give the Clinton White House time to attempt to bring the deficit down. But expectations will be very high, he says. If there are no genuine spending cuts and no meaningful deficit reductions, then there will probably be no Clinton re-election in 1996, Stack predicts.
Rao Chalasani, chief investment strategist for Kemper Securities Inc., suggests that investors remain cautious about the market, in part because it is hitting new highs. But he likes a number of sectors including infrastructure companies, financial firms, cyclicals, and some environmental companies.