WASHINGTON - One fascinating feature of financial markets is that they price themselves in anticipation of events, and that is certainly true in the case of the bond market and President-elect Bill Clinton.
The bond market fretted over the prospect of a free-spending Democrat in the White House during the weeks leading up to the election, so that by the time the votes actually came in for Clinton, market reaction was muted. Both short-term and long-term rates had already edged higher before voters went to the polls.
According to Federal Reserve data, six-month Treasury bills yielded 2.85% in the week ending Oct. 2 and moved up to 3.22% in the week ending Oct. 30. Six-month certificates of deposit during the same period moved up from 3.10% to 3.46%, and yields on 30-year Treasury bonds increased from 7.34% to 7.63%.
The rise in rates occurred as investors came to the conclusion that Clinton would win and begin his term in office by pushing for additional spending that would widen the federal budget deficit. Some investors also concluded that the Fed was no longer inclined to lower rates, but the main reason was a market bout of clintonitis, which is the fear of Clintonomics.
Clinton himself went out of his way last week to seek to assure financial markets. "We understand the need to pursue stability even as we pursue new growth," he said in a statement that he read outside the governor's mansion in Little Rock.
The message was an attempt to assure the markets that while the new Democratic administration remains committed to reviving the economy and producing jobs, it will not forget the need for fiscal prudence.
In fact, the bond market is already braced for at least a modest stimulus program in the range of $25 billion to $35 billion from Clinton when he submits his budget to Congress in January. That would not be too much in a total budget of $1.2 trillion.
"The market is priced for a package that will sound good but won't really provide a lot of stimulus," said James Winder, money market economist for Merrill Lynch. The market could still see some nervousness that sends rates a little higher in the next couple of months, Winder said, but many on Wall Street are convinced that Clinton knows that if he submits a bad budget, his presidency "could be buried right from the start."
To further his credibility with the markets, Clinton will have to pick a Cabinet that includes some seasoned hands with experience in finance and business. Wall Street executives will pay close attention to the President-elect's choices for Treasury secretary, director of the office of management and budget, chief economic adviser.
Equally important, Clinton will have to present a budget that holds out a realistic promise of reducing the deficit after 1993 as the economy regains its strength. Gimmicks like raising taxes on foreign corporations based in the United States or trimming the federal work force won't get the job done.
Perhaps the best thing Clinton has going for him is his own personality and the public trust of voters who sent him to the White House. As one Clinton supporter from Independence, Mo., said when interviewed on CNN, Clinton seemed like "a good cheerleader for America."
With his exuberance and his tireless campaigning and speechmaking, Clinton made people believe someone cared for them. Bush never grasped how the economy's stall had affected people's lives and did not get out on the hustings until it was too late. He failed to erase the image of a detached, out of touch President.
If the new President can help boost public confidence, making people feel better about themselves and their future, he can help revive the economy. That is because depressed consumer spirits, as much as anything, are holding things back.
If he takes advantage of his youth and vigor and optimism, Clinton has a chance to seize the moment and help shift the national mood. If he does so with an intelligent and carefully crafted economic program, he can validate the trust of the voters and ease the fears of the moneybags on Wall Street.