Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, December 30, 1993 TAG: 9401040009
SECTION: EDITORIAL PAGE: A11 EDITION: METRO
SOURCE: Ray L. Garland
DATELINE: LENGTH: Long
The first year of the Clinton Terror has been remarkably kind to investors and to borrowers. The Dow Jones Industrial Average of 30 big stocks, which began the year below 3300, is ending it in close proximity to 3800, for a capital gain of 15 percent plus dividends. Bonds did even better. While it's always easy to lose money in stocks, even in a bull market, 1993 was a year in which you had to be a real genius to lose money in bonds.
Interest rates plunged through mid-October, accelerating a four-year trend, enabling individuals, corporations and governments to save untold billions through refinancing. But at year's end, it seemed clear the Federal Reserve was trying to summon the political courage to nudge rates higher.
A harbinger of that old devil inflation might be found in the prices of basic commodities such as lumber and soybeans. Taken as a whole, commodities have risen 10 percent since last Jan. 1, despite an astounding 30 percent decrease in the price of oil. But most commodities are still substantially below their peaks of former years.
Gold, the last refuge of the nervous in times of uncertainty, has risen smartly from its truly depressed level of 12 months ago. But every time it approaches $400 the ounce it gets slapped down, which seems to say the smart money is betting on continued price stability.
The media deserve our thanks for ending the great recession promptly at noon, Jan. 20. But the amazing thing is that growth in the nation's gross domestic product in the first three quarters of 1993 has been considerably below what it was in 1992! Figures for the fourth quarter of '93 aren't in yet, but they will have to go some to equal last year. Surprise, surprise: Economic growth in Bush's last year was a lot stronger than in Clinton's first.
But the media, having lost interest in covering America's economic collapse after 12 years of Republican rule, have moved on to making crime the big story despite FBI statistics showing that picture no worse than it has been and probably a tiny bit better. Again, there's nothing more dangerous than a general idea fixed in a narrow mind.
Still, when it comes to economic decision-making, perceptions are everything. We may not have seen much of a peace dividend from the defeat of communism, but we've certainly seen a lot of the peace dividend from the defeat of George Bush. The dominant media culture is happier; the Democratic Congress is happier; bureaucrats are happier; and big business is far from unhappy.
Most experts say that, by historical standards, stocks are more than fully priced. But when you look at who holds them - mainly mutual funds and pension trusts - you have to ask the question, "Where else will they put their money?" The absence of good alternatives argues for higher stock prices, perhaps 4100 on the Dow by spring. But corporate earnings will have to keep up to make those prices stick. It won't take much of a scare to spook this market.
Any substantial pullback should be seen as a buying opportunity. Only two years ago, remember, Chrysler sold for $11 a share and Ford traded as low as $24. The big money is always made by those willing to buy when the sellers are hysterical.
For most people, mutual funds are the best way to own either stocks or bonds. A good compromise might be a convertible bond fund that offers reasonably high dividends plus the chance of capital appreciation if the underlying common stock goes up. These hybrids generally have outperformed both stocks and bonds individually.
While the stage is set for a modest rise in U.S. interest rates, there seems little chance they will soar. There seems too much surplus capacity worldwide for that to happen soon. Besides, the inflationary psychology that ruled for more than 20 years has only recently given way to a deflationary psychology. History suggests that such fundamental trends, once firmly in place, are not soon nor easily ended.
While it seems clear that the big money has already been made in bonds, those Virginians who pay more than 30 percent of their income in federal and state taxes, and who are anxious to preserve capital, will find few better investments than our own state and local tax-free bonds. As this is written, you can buy a Virginia tax-exempt bond fund for about $11 a share yielding slightly better than 5 percent, and high-grade individual bonds with long maturities paying a little more.
It's amazing to reflect that the prime rate, now 6 percent, was 11.5 percent as recently as February 1989. There's one very large obstacle to rates rising rapidly, and that's our ever-growing national debt. Any significant increase in rates would quickly translate to another $125 billion on the deficit, and that's close to unthinkable.
Predictions of golden ages are as plentiful as evidence of their failure to materialize. But the efforts of many nations to throw off the trammels of socialism are a hopeful sign. A rise of only 1 percent a year in the disposable income of 1.5 billion Chinese, Russians and South Americans - if sustained over 15 or 20 years - should create the greatest explosion in trade ever witnessed. With its vast flexibility, America is still in the strongest position to broker a rapidly changing world.
\ Ray L. Garland is a Roanoke Times & World-News columnist.
by CNB