Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, November 10, 1994 TAG: 9411100077
SECTION: BUSINESS PAGE: B8 EDITION: METRO
SOURCE: KNIGHT-RIDDER/TRIBUNE
DATELINE: NEW YORK LENGTH: Medium
U.S. financial markets were enamored with Republican Congressional gains for all of half a day.
The dollar and Treasury bond prices climbed overseas and U.S. stock prices opened sharply higher Wednesday morning partly on the dramatic news that Republicans had wrested control of both houses of Congress from the Democrats in mid-term elections.
But by midday, glee in the financial markets largely had given way to the sober assessment that the GOP may not be as friendly over time to markets as previously thought.
``Near term, in the next few days people will look at the Republican victories as good news for fiscal conservatism,'' said Douglas Lee, chief economist for County Natwest/Washington Analysis.
But, in the longer term, ``I think it becomes a much more complicated issue. Once the euphoria wears off, there is a lot to think about,'' he said.
In particular, analysts pointed to two potential pitfalls for financial markets. One is the prospect of Republican committee chairmen in the House and Senate holding exhaustive hearings on the Whitewater scandal early next year.
Such a scenario, if played out, could cripple the Clinton administration, stifling policy initiatives and driving foreign investors away from U.S. markets.
The second predicament could be tax cuts that Republicans have promised. They have not detailed how they would compensate for the lost revenue.
Unfunded tax reductions, like those in the Reagan area, could drive up the budget deficit, spook bond traders and cause interest rates to rise.
Post-election enthusiasm toward the dollar is not warranted given the worsened outlook for the budget deficit, said David Gilmore, a partner at Forex Analytics.
One lesson Democrats learned from Tuesday's rout is the importance of delivering middle-class tax cuts, a Clinton campaign promise and a keystone in the GOP's ``Contract with America'' plan, Gilmore said, adding that the likely result would be a ``bidding war on tax cuts.''
Whitewater is another important reason the markets ``shouldn't be snowballed'' into buying dollars, he said. Alfonse D'Amato, R-N.Y., who will take over the chairmanship of the Senate Banking Committee, will go full steam ahead on Whitewater, he said.
Stock-market analysts were more dismissive of the implications of the party shift than some of their counterparts in the foreign-exchange and credit markets, despite the Dow industrials swinging from a 38-point gain to a 20-point loss at midday as exhilaration over Republican gains waned.
Bob Doll, director of Oppenheimer Management Corp.'s $12 billion of equity investments, said that while he viewed the GOP victory as positive for the financial markets, he is cautious about the proposed tax cuts by the elected GOP officials.
``At the extreme, if they had said they would cut tax rates and that this would mean $100 billion less to the Treasury, this would not be good news ... we'd get closer to a recession sooner than later,'' Doll said.
However, he added, ``if tax decreases are targeted to things that promote investments, like IRAs [individual retirement accounts] or a capital-gains tax cut, as opposed to a tax that would encourage consumption,'' this would be positive.
Analysts cautioned against expecting an immediate reaction from the markets to the election.
Already, with the election over, markets here have turned their attention to their previous focus, the Federal Reserve and interest-rate policy.
``After the initial euphoria fades, U.S. markets will probably quickly refocus on what's of paramount cyclical importance: rising short-term interest rates, and the negative implications of that for the dollar and U.S. stocks and bonds,'' said equity strategist Jeffrey M. Applegate at CS First Boston.
by CNB