Clintonomics has shaped the investment mentality of 1993.
Americans are snapping up municipal bonds in anticipation of higher tax rates. They're dumping pharmaceutical stocks from fear of health-care pricing controls and switching into industries expected to prosper under the new administration.
Our citizenry has driven the stock market to dizzying heights on general economic confidence, though it still gets cold feet and backtracks on days that rumors from Washington become worrisome.
Most of all, investors are accepting the gospel of low interest rates, which President Clinton installed as his cornerstone of economic stimulus. As Clinton speaks reverently about the bond market almost daily, the value of existing bonds has risen, gladdening hearts and pocketbooks of bond traders everywhere.
"Biggest surprise of 1993 is that the Clinton administration has gotten tremendous confidence out of the credit markets, which are generally skeptical about promises for deficit reductions and spending cuts," observes Greg Smith, chief investment strategist for Prudential Securities.
"By emphasizing a need to bring health-care inflation under control, Clinton gained credibility with the bond market as to his seriousness about keeping inflation down."
The real test, Smith believes, is whether enthusiasm in public opinion polls for budget cuts and tax increases can be sustained through summer, continuing to assist the bond market.
"It's a surprise how strong bonds have been and how much interest rates have fallen, particularly when economic data keeps getting better," adds William Dodge, chief investment strategist for Dean Witter Reynolds Inc. "Investors are chasing yield in 1993 because there are big incentives to extend maturities."
Nonetheless, though interest rates can go lower, there's always a risk of trending a bit higher. Despite bond-market euphoria, there may be more risk than reward. As a result, Smith recommends putting only 20 percent of a portfolio into bonds, with 70 percent in stocks and 10 percent in cash. Dodge recommends 25 percent bonds, 60 percent stocks and 15 percent cash.
Even with solid stock-market prospects, not all choices will be golden.
"I see 1994 as the year of world economic growth, with likely corporate profit increases of 30 percent or more," says Smith, who is avoiding drug stocks.
"That means so-called predictable growth companies of the past, which feature 15 percent annual earnings growth, are no longer very interesting."
Anticipating an 8 percent to 10 percent rise in 1993 in the Dow Jones industrial average, Smith recommends Louisiana Pacific in lumber and pulp; XTRA in transportation equipment leasing; Mesa Airlines in regional travel; Illinois Central in rail freight; Nucor in steel joints, angles and rounds; and Oregon Steel Mills in steel plate and pipe.
In banking, he likes Citicorp, Chase Manhattan and First Chicago, while retailing favorites are Dayton Hudson and
Nordstrom. In automotive, his picks are Ford Motor and General Motors, as well as supplier Allied-Signal.
"Don't make major commitments to pharmaceutical stocks or packaged-food stocks yet, and realize many retailing stocks are somewhat ahead of themselves," warns Dodge, who also is avoiding airline stocks.
Predicting the Dow will reach 3600 to 3700, Dodge believes bigger companies will do best in 1993.
He recommends Coventry in health-benefits services and health maintenance organizations and Ramsay-HMO in medical-service centers. Banking choices are Chemical Bank, BankAmerica and First Bank System. Chrysler is his favorite automaker, and he likes Excel Industries in vehicle window systems.
Other suggestions are Novell in personal computer network systems and Microsoft in software.
Be cautious: Smith, predicting 3 percent inflation, believes that interest rates may have hit their lows and that the bond market will likely give back all of its rally this year.
Meanwhile, Dodge, forecasting 3.5 percent inflation, contends that short-term rates should be rising more rapidly than long-term ones as the economy improves.
But, while inflationary fears will nag the bond market, they shouldn't threaten the basic long-term attractiveness of bonds, he concludes.