After months of reticence on the subject, the financial markets finally are pondering the economic consequences of a presidential victory by Bill Clinton.
While the Arkansas governor has held double-digit leads over President Bush in polls for several months now, the markets steadfastly had refrained from reacting to those results, economists say. Until a few weeks ago, that is.Evidence of the important attitude shift began subtly emerging early this month in a recent sharp rise in long-term interest rates that several economists said is at least partly tied a recognition among investors that Clinton has the best chance of winning.
That belief was vividly illustrated in a mid-September survey by the National Association of Business Economists showing its members now believe by a 2-to-1 margin that Clinton would win his White House bid.
Behind those views is the growing belief that Bush is unlikely to conquer Clinton in the final feverish countdown, with little more than a month to election day.
"The financial markets are only now beginning to factor in a Clinton victory," said Brian J. Fabbri, chief economist for Midland Bank in New York.
Global markets typically react to political and economic events before they actually occur, meaning that traders will sell or buy depending on their expectations of how future developments will influence the value of bonds, stocks, currencies or commodities.
In the case of the presidential election, bond traders generally fear that a Clinton presidency would produce higher federal deficits than another Bush term.
While Clinton has pledged to cut the deficit in half during his administration, Democrats historically have been associated with bigger federal deficits.
That, investors reason, would hurt the value of bonds since the government would need to boost the supply of debt to help pay for more spending. Extra supply hurts the value of available securities and mutes demand for more.
Consequently, economists say, long-term bond yields are rising as investors demand higher interest rates to compensate them for the perceived likelihood that bonds could be hurt down the road.
"I think the market feels there will be a considerable pickup in the deficit under a Clinton administration as opposed to Bush," said Anthony Chan, a senior economist for Barclays de Zoete Wedd Government Securities Inc. in New York.
Marshall B. Front, president of Stein Roe & Farnham Inc. Investment Council in Chicago, said the prospect of a Clinton victory also may be fueling fears of higher inflation, another bond bugaboo.
Clinton has proposed pumping more money into the nation's infrastructure, which not only could boost the deficit but also might heat up the economy. Both could lead to higher consumer prices.
Bond investors loathe high inflation because it erodes the value of fixed-income bonds, particularly long-term issues that won't produce any principal for many years to come.
"That inflation fear, which is always latent, is somewhat heightened by the prospect of Clinton being elected," Front said.
Other economists say the chance of higher inflation under Clinton is mixed, particularly since Federal Reserve Chairman Alan Green-span is likely to continue his anti-inflationary monetary policies even during a Clinton presidency.
Particularly unappealing to investors is the decreased likelihood of a cut in the capital gains tax during a Clinton presidency. The prospect of losing an investment carrot championed by Bush may be hurting the stock market in particular, which would benefit from increased demand from investors seeking a break on their income taxes.
There also are doubts about Clinton's plans to raise more revenues to offset his higher spending. His most publicized proposal would increase taxes on the richest Americans, but most economists agree that revenues from such taxes would probably be less than Clinton claims.