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On Wall Street, a Wounded Clinton Is Worst Scenario


Investors are worried about President Clinton's fate for a single reason: They hate uncertainty of all types, and the specter of a possible impeachment represents uncertainty at its worst.

As Thursday's deep sell-off demonstrated, investors fear that the U.S. is unlikely to provide world economic leadership at the moment when it's most needed. Even worse, investors don't know whether a weakened Clinton can hang on to his office, thus maintaining his economic programs, or whether they will have to adjust to newly emboldened Republicans and their ideas.

In a reversal of how Wall Street usually views Democrats, investors have generally approved of Clinton's hands-off economic policy. In fact, some professional investors prefer the countervailing forces of a Democrat in the White House and Republicans in control of Congress.

Whether or not Clinton is forced out of office, the market would prefer the outcome sooner rather than later.

"Having a wounded president holding on for a couple of months is really going to weigh on the market," said Charles A. Gabriel, senior Washington analyst for Prudential Securities Inc. "The biggest risk from here is that you have a wounded Clinton staying on rather than being forced to resign."

Until now, Wall Street has largely assumed that Clinton would survive his controversy, experts say. When the president gave his grand jury testimony last month, the market staged its only significant two-day rally in the current downturn.

But that changed Wednesday when independent counsel Kenneth Starr delivered a report that Starr's office described as "substantial and credible" evidence for a possible impeachment.

"Up until Tuesday, it wasn't a factor in the markets," said Tom Gallagher, a political economist at Lehman Bros. "Investors knew the president had problems, but no one adjusted their portfolios to account for that. But the submission of the Starr report is an important market event because markets don't like uncertainty."

The possibility that Clinton could resign or be impeached creates a jumble of emotions for investors because Clinton has been largely positive for the market.

His positions on such things as free trade and deregulation have been warmly received by investors. What's more, his choice of Robert Rubin as Treasury secretary and his reappointment of Alan Greenspan as head of the Federal Reserve won near-unanimous praise.

"The markets have loved Bill Clinton," Gabriel said.

As George Benston, a finance professor at Emory University in Atlanta, put it: "Clinton has been the best Republican president we've had in some time."

Though markets generally prefer Republicans, some investors are worried the GOP might gain too much strength amid Clinton's troubles.

For example, some Republicans are agitating for a tax cut package. But Wall Street has been lukewarm to the idea because it fears it would eat into the government's recently achieved budget surplus. It also worries that Republicans would push defense spending, which also would chip away at the surplus.

"I tell my clients who are mostly conservative to be careful what they wish for," said Greg Valliere, chief political analyst in Charles Schwab Corp.'s Washington research group.

Other experts fear the biggest short-term danger is liberal Democrats gaining extra clout. Their reasoning: Clinton badly needs Democratic backing to stay in power, and to garner that support he may have to give in to their costly pet projects.

However, not everything is bad for the market. Experts concur that Greenspan and Rubin are firmly in control of the economy and are unlikely to give up the reins any time soon. Greenspan's term runs to the summer of 2000, and Rubin--though some experts believe he'd like to leave office--is being pressured to stay because of the current situation.

Clinton's impact on the market has brought vague memories of how the Watergate scandal affected stocks. Though the situations are broadly similar, there are significant differences.

A host of deep economic problems threw the stock market into a severe bear market in 1973 and '74; Richard Nixon's political troubles merely added to a laundry list of negative factors.

The 1970s picture was far gloomier, many experts say. Inflation was rising and oil prices soaring, neither of which is occurring today.

One key difference for the market today is that Richard Nixon's resignation resulted in a stream of young Democrats' being elected to Congress, Valliere said. The market generally disliked their liberal policies.

In contrast, Republicans--and their conservative fiscal policies--are likely to do well this November, he said.

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