Maybe Wall Street And Clinton Can Just Be Friends

For weeks, as the stock market climbed to new records, the drumbeat from Wall Street has been ongoing: A correction, market mavens insisted, was on the way. Well, on Feb. 15, President Clinton gave the public a peek at his economic plan--and the following morning, the market, amazingly, seemed to do what was predicted. Large and small stocks fell like ninepins, with over-the-counter stocks tumbling nearly 4%, and falling again the next day.

Is the stock market's honeymoon with Bill Clinton finally over? The answer to that is surely yes. But the recent histrionics is probably no more than a brief interruption in a bull market fueled by low interest rates. True, there has been a definite--and by no means discouraging--shift in sentiment toward bearishness. But even the most anti-Clinton investment pros don't believe that the Clinton economic plan will drag the markets into perdition. "The whole tone of the first two to three weeks of this Administration has been an antibusiness tone," complains Raymond Worseck, chief economist of A. G. Edwards & Sons Inc. in St. Louis. Even so, Worseck's long-term market view remains positive.

DRUG DISASTER. With the "Clinton market" at an end, what lies ahead is far dicier. While the overall direction will be up--continued low rates will see to that--traders and investors can be expected to pounce on the downside in the Clinton economic program as it unfolds. One early casualty is the health-care sector, which is still reeling from the President's attack on pharmaceutical-industry pricing practices. Pharmaceutical and biotechnology stocks were slaughtered on Feb. 16, contributing to a 3.6% decline in OTC stocks, and the carnage continued on Feb. 17, when the NASDAQ composite was off an additional 1%. "I think the market had gotten a bit ahead of itself, and that some kind of correction was lurking. Clinton was the catalyst, of course, but the market was in an overbought condition--and I suspect that there will be more weakness in the days and weeks ahead," observes James Solloway, director of research at Argus Research Corp.

Indeed, as the pain inherent in the Clinton economic plan becomes moreevident, the stocks of affected companies will continue to nose-dive. But the likelihood of a full-blown blowout remains scant, because of the market's ace in the hole: interest rates. Long rates declined, briefly, on Feb. 16 in reaction to the speech and then fell again the following day. With 30-year Treasuries yielding 7.1%, and short rates remaining below 3%, the old "no-place-else-to-invest" argument for stocks remains valid.Another cheery tiding is a rise in bearishness. Leading brokerages such as Goldman, Sachs & Co. are advising investors to raise their cash levels. Such nervousness is cherished as a contrary indicator. John S. Lyons, president of J. Lyons Fund Management Inc. in Chicago, notes that, by contrast, "smart money" remains bullish. Among the latter are stock-exchange specialists, who still have only paltry short positions, which Lyons views as a good sign.

As high-bracket taxpayers, Wall Streeters don't much like the castor oil that Bill Clinton is trying to pour down their throats. But if he succeeds in cutting the deficit, and long rates keep falling, the Street's Clinton-hecklers will be grousing all the way to the bank.

Before it's here, it's on the Bloomberg Terminal.