Markets Drop Sharply In Spite of Clinton's AppealsBy Jay Mathews
The Washington Post
Unmoved by a weekend of Clinton administration appeals for calm, the stock and bond markets dropped sharply again Monday as long-term interest rates reached their highest levels since Clinton took office.
Few analysts Monday risked precise predictions about how far the financial market slide would go, but some economists said it could become a threat to continued economic growth if the decline makes it harder for businesses to raise funds.
The cash that once flowed into the markets on a wave of optimism about a growing, low-inflation economy has begun to recede as inflation fears push up interest rates. Mutual fund managers say they are detecting signs of outflows after several years when money poured into retirement funds and other investments, pushing stock prices steadily higher.
The bond market's increasing fear that higher inflation rates loom pushed the yield on the benchmark 30-year Treasury bond to 7.40 percent Monday. In other words, investors are demanding a higher return than they did the day Clinton was inaugurated, when the yield was 7.32 percent.
The American economy, by all statistical signs, is at its healthiest point in years, but stock and bond investors ignore that and worry about the future when they expect their investments to pay off.
Investors interpret robust growth of incomes and jobs now as indicating that inflation down the line will be higher, and U.S. stock and bond prices weaker, especially when compared with competing investments.
Some bond experts suggested that the rapid rise in interest rates could soon do significant damage to the economy as homes and business loans became difficult to obtain.
Other analysts said the economic data did not justify such concern and that the Clinton administration still had much to be thankful for. "In the final analysis people will make their judgments much more on the basis of rising incomes and jobs than on the behavior of the financial markets," said Paul Isaac, chief economist at Mabon Securities.
Council of Economic Advisers Chairman Laura D'Andrea Tyson discounted the notion that rising interest rates necessarily threaten sustained economic growth. "The truth is that there is no magic level at which you would worry or not worry about interest rates," she said, because "interest rates are jointly determined with many other things going on in the economy."
Tyson said the strength of recent economic indicators "suggests that if anything the economy might grow a little faster than 3 percent" in 1994, which is the administration's official forecast for gross domestic product growth this year.
Asked about the interest rate surge during a television interview in Cleveland Monday, Clinton said "interest rates are still lower than they were at the bottom of the recession." He said the rates were "still too high" and that he thought "they'll come back down" but said, "I don't think there's any reason to be worried about the long-term health of the economy."
After the stock markets closed, the president said, "We'll get through this if everybody will just remain calm and let the market work itself out. It's going to be fine. We just have to ride it through."
The stock market began the day with a feverish reaction to the report of massive job growth, released Friday when equity markets were closed for the Good Friday holiday. The Dow fell more than 80 points, then some economists pointed out that the jobs report indicated economic slack that would ease pressure to raise wages and inflationary pressures. Investors also took heart from a few analysts who recommended stock purchases.
Byron Wien, chief market strategist at Morgan Stanley & Co., told investors during a morning conference call that the stock market appeared to be stabilizing, and recommended reducing the cash portion of their portfolios -- always large in times of uncertainty -- to 10 percent or less from the 13 percent recommended earlier.
Stocks rallied, but in the early afternoon the bond market took another deep dive, causing interest rates to rise. Analysts said they had reports of forced sales by investors who would have preferred to stay in the market but had borrowed heavily in anticipation of a healthy market and needed to pay off debts. Crude oil for May delivery also rose $1 a barrel to $15.79, stoking inflation jitters.
"It will be very difficult for the stock market to rally before the bond market rallies," said Eric T. Miller, chief investment officer at Donaldson, Lufkin & Jenrette Securities Corp.