Will Clinton Bomb Erode Confidence on Wall Street?

The latest bomb to drop on the White House sent shrapnel as far north as Wall Street last week.

It couldn’t have been pure coincidence, after all, that the Dow Jones industrial average fell 172.38 points from Wednesday through Friday, ending the week at 7,700.74.

Or that the dollar dropped sharply against the Japanese yen and German mark, finishing the week down 3.73 yen at 125.57, a two-month low.

Or that the benchmark long-term interest rate, the 30-year Treasury bond yield, jumped to 5.97% by Friday’s close, up from 5.80% a week earlier and the highest since Dec. 17.

The markets worry that much about what happens to Bill Clinton? His enemies, of course, would have us believe that the country would be vastly better off without him. But the implication last week that impeachment is conceivable--if obstruction of justice can be proved, and traced directly to the president (two very big conditions, obviously)--triggered some unpleasant memories for Wall Street veterans.

The last time the serious possibility of impeachment hung over the market was in 1974, when the Watergate scandal was destroying the presidency of Richard Nixon. Coincidentally, the stock market that year suffered its worst decline of the post-World War II era, as the Dow average plunged 28%, after a 17% decline in 1973.

Wall Street certainly had much more working against it in 1974 than just Nixon’s demise. His resignation in August of that year, as impeachment appeared inevitable, occurred against a backdrop of rocketing oil prices (thanks to the newly formed OPEC), soaring inflation and the worst economic recession since the 1930s.

Anyone old enough to remember that period probably remembers how depressing it all was, and how great was the national crisis of confidence. Which is to say, it was not a time when buying stocks--which essentially are claims on the future--seemed like a great idea.

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Today, if you pay no attention to the political feeding frenzy going on inside the Washington Beltway, you can be quite optimistic about the country’s future.

Economic growth still appears on track, despite the threat from Asia’s mess; interest rates overall are down sharply from last summer; and, quite unlike in 1974, oil prices are collapsing rather than rising. (Let’s face it--for Americans, feeling good at the gas pump makes up for a lot of bad news elsewhere.)

What’s more, with the federal budget basically balanced, and a Republican Congress, it’s fair to ask whether it matters which Democrat is in the White House.

“A lot of policies have [already] been set, and a lot of changes have already been made” on major issues such as welfare, noted Roy Blumberg, investment strategist at Josephthal Lyon & Ross in New York.

Thus, the prospect of Vice President Al Gore moving into the Oval Office probably wouldn’t be very troubling to financial markets, Blumberg said.

Others, however, understandably worry that Gore represents the more liberal side of the Democratic Party, and that he could accelerate what some Wall Streeters view as Clinton’s sudden attempts to create new, big-spending social programs--details of which Clinton will provide in his State of the Union speech on Tuesday.

“Gore could be viewed [by markets] as threatening,” said Bradlee Perry, veteran market analyst at David L. Babson & Co. in Boston. Still, he adds, “with a Republican Congress, he wouldn’t be getting much done.”

Some analysts say that kind of talk is, on one hand, getting far ahead of events, and, on the other, is missing the point: If Clinton’s problems escalate, the effect will almost certainly be to erode confidence about the country overall and, by proxy, to erode confidence in financial markets. How could it not?

“It’s hard to make a case that political uncertainty is a positive for markets,” said Douglas Cliggott, U.S. equity strategist for J.P. Morgan Securities in New York.

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Currency markets appeared to be saying as much on Friday, as some global investors fled dollar-denominated securities for the Japanese yen and German mark. Dollar-selling was reflected in the sell-off in bonds Friday, pushing long-term yields up.

One can argue that the dollar and bonds both were ripe for pullbacks after their substantial rallies in recent months. And if Asia’s economic crisis is stabilizing--at least temporarily--U.S. markets’ “safe-haven” status may be lessened for the time being.

The big risk is that that status could be meaningfully undermined over an extended period if foreign investors watched, horrified, from the sidelines as a battle ensued to evict the president of the United States from office.

Let’s not forget that foreigners own about 30% of marketable U.S. Treasury securities--no small sum.

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What if the most serious allegations against Clinton can’t be proved, but neither can he produce enough evidence to fully exonerate himself? If the result is that Clinton is emasculated in the eyes of the people, Congress and the rest of the world, financial markets may not care much initially. But the president’s inability to lead could be deeply troubling if another global crisis demanded such leadership on America’s part.

Asia’s nightmare, for example, “will be very long-lasting,” warns Charles Pradilla, chief investment strategist at Cowen & Co. in New York. As the only superpower left--and with Japan unwilling to even entertain the idea of taking on a bigger political role in Asia--U.S. leadership will be crucial if the crisis begins to worsen again.

The White House also is at greater risk now of its own leadership vacuum. Many Washington analysts expect a rash of resignations from senior staff, as this latest blow to the administration takes a psychological toll on people. Friday, rumors started that Treasury Secretary Robert Rubin would resign. Rubin’s spokesman called that talk “utterly ridiculous.”

Perhaps most worrisome of all, the potential now is there for Clinton’s enemies abroad, including Saddam Hussein, to attempt to test the president’s hold on power with minor or major mischief.

“Anyone who opposes him knows this is the time to go after him,” one money manager said last week.

Amid the rush to judgment last week, some analysts also noted that, whatever people think of Clinton personally, he has not been unfriendly to Wall Street. Indeed, Clinton has fought in recent years for the things the market most wanted--including freer trade and a balanced budget. (More trade battles loom, with some in Congress adopting an increasingly dangerous protectionist tone.)

“Clinton knows that an 8,000 Dow is better than a 7,000 Dow,” said Timothy Morris, chief investment officer at Bessemer Trust Co. in New York. The president’s woes, whether self-inflicted or not, “are just something the market doesn’t need,” Morris said.

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Indeed, while it seems unlikely for now that Clinton’s travails are enough to make a large number of people want to sell stocks, the market overall is still priced for near-perfection in the economy: Blue-chip stocks’ average price-to-earnings ratio, based on estimated 1997 earnings, is about 21, which is the top of the historical range.

That leaves little room for any development that could erode investors’ confidence in the future. And as Asia has so painfully demonstrated over the last six months, confidence ultimately is the only difference between bull and bear markets.