Sex, lies - and the Dow Jones

The Clinton saga is adding to market jitters, with traders fearing the consequences if the President is forced to quit

Share traders are known the world over for their childish and misogynistic sense of humour. No surprises there, nor in the fact that the best - and worst - jokes about Bill Clinton and Monica Lewinski are those heard on dealing room floors.

But where it really matters they are unshockable. To put it crudely, who cares where Clinton puts his cigars as long as share prices are going up?

The White House, of course, has always understood this. In the early days of the Clinton sex scandal - should that be saga? - Democrat aides often lectured reporters that the real issue was "not Paula Jones, but the Dow Jones". Their point was that, with the Dow then climbing to regular record highs, American voters would be content to let the President's sex life take care of itself.

But now the Dow Jones is on a far shakier footing, with no end to its volatility in sight, and the two issues have become inextricably entwined. This is an issue not just for US savers, but for UK ones as well.

What Clinton does next will not only help to shape the Dow's future performance, but also to determine the extent to which US leadership can mitigate the effect of financial crisis everywhere from Brazil to Japan. What - if anything - should the beleaguered President do if he wants to help restore some measure of market stability?

One group which should be able to answer that question are the unit trust managers who pump billions of pounds of UK savers' money into America. Managers looking after some of the UK's biggest North America trusts are relieved that Clinton's video testimony was less damaging than had been expected, and now want him to tough it out.

David Ross is manager of the pounds 471m Fairbairn American Equity unit trust, one of the biggest in the sector. He believes Wall Street's nerves are already stretched so tight that the last thing Clinton should do is resign. He says: "There's a lot of bear market mentality about. In a bear market, any news that can be interpreted in one of two ways will be interpreted in a negative light. Sudden news coming across the screens that Clinton had resigned would be seen as bad news."

Zanny Perring, manager of Threadneedle's pounds 310m American Growth trust, agrees, pointing out that there is no guarantee that replacing Clinton with vice-president Al Gore will spell an end to scandal in the White House. "Some people would consider Al Gore's political position over accepting funding for his election campaign is just as difficult as Clinton's," she says. "Fourth in line to the presidency is Newt Gingrich - and no- one would want to see him anywhere near the Oval Office."

She too thinks that savers in her trust will be best served by Clinton soldiering on, and believes the worst may be over. "The longer the affair drags on, the less of an impact it will have," she says. "The fact that the Dow was up 38 points on the day Clinton's video testimony was broadcast when the rest of the world was about 3.5 per cent down I think speaks volumes."

Certainly US traders' initial reaction to Clinton's testimony was an encouraging one for the President. The Dow started Monday in nervous mood, falling by some 100 points in anticipation of the broadcast. But by the time Clinton was halfway through his four-hour testimony, traders had recovered their confidence and the index climbed steadily for the rest of the day.

Ian Brady, manager of Perpetual's pounds 337m American Growth unit trust, takes a slightly different view. He says: "On a 12-month view, I don't think it makes much difference what Clinton does. Remember, even at the time of the Kennedy assassination, the market went down, but it didn't stay down - it was very much a one-month wonder."

The cruel truth is that Clinton's influence on the US market is tiny next to that of Alan Greenspan, chairman of the US Federal Reserve and the man responsible for setting American - and world - interest rates. A terrorist hoping to destabilise US and world markets would be far wiser to shoot Greenspan than Clinton or any other President for that matter.

Mr Brady argues: "Deep down, most people on Wall Street think that, as long as Greenspan is still in charge, then the US economy is not a big problem." Ms Perring agrees, saying: "Thank God we've got Greenspan at the economic helm rather than Clinton."

It is Greenspan's role that will be crucial in the months ahead. Both Brady and Ross hope to see a cut in US interest rates soon.

Mr Ross says: "I think the US economy will slow down. The question is the degree to which that will happen, and that is going to be a function of how quickly the Fed cuts rates. If the Fed starts to cut rates in time, then the outlook for equities is not too bad."

His guess is that the Dow will close 1998 at somewhere around 7,400 - about 7 per cent down on its level of 7,933 after Clinton's video broadcast on Monday. Mr Brady is more optimistic, predicting a 1998 close of around 8,250.

"I think we'll get at least one rate cut before the end of the year, and that will be enough to see a modest increase in the Dow from here," Mr Brady says. "But volatility is here to stay. In 1995, 1996 and in the first half of 1997, there was an amazing lack of volatility. We're back to average or above average volatility now, and I don't see that changing any time in the near future."

Ms Perring says: "The market has come in for a lot of damage, and it is going to take a long time to repair. But, having said that, we are still up 5 per cent over the year to date."