Interest-Rate-Sensitive Stocks To Prosper in Election Year

ELECTION years tend to smile on the stock market. Barring the unexpected, 1992 should be no exception - particularly for sectors such as housing, finance, and home refurbishing. When the economy posts an upturn, folks rush out to buy paint, wallpaper, and curtains.

In only one presidential election year in the past half century has the Standard & Poor's 500 index lost ground between January 1 and election day, says James Stack, editor of InvesTech, a newsletter. That occurred in 1960, when John F. Kennedy defeated Richard Nixon and the Republicans turned the White House over to Democrats after eight years.

So if history is a guide, the market should be expected to continue to rise this year, even if a market correction occurs. But analysts also stress that not all market sectors are expected to do equally well. In fact, because of the uniqueness of this election year - coming in the midst of a lackluster recovery following a long recession - specific market sectors are expected to outperform the broader market. According to a number of analysts, areas with special promise in 1992 include home building, hom e refurbishing, financial institutions linked to the mortgage market, health care companies, firms relating to the infrastructure, paper stocks, and some defense stocks whose long-range programs will not be affected by upcoming Pentagon cutbacks.

"Some sectors are obvious, such as the home building group," says Larry Wachtel, a vice president with Prudential Securities Inc. That would mean companies such as Georgia Pacific or Sherwin-Williams. But at the same time, says Mr. Wachtel, investors must stay alert because of the "anticipatory mechanism" of the market.

President Bush and the Democratic presidential contenders are talking about various investment incentives, tax breaks, and special aid to first-time home buyers, designed to boost construction. But much of the potential expansion in housing is already being "discounted by the market," Wachtel says. Thus, for the individual investor, the fact that a stock is rising now may not mean that it will rise later in the year when housing is presumably posting gains.

Rao Chalasani, a market strategist with Kemper Securities Group Inc., sees a number of potentially promising sectors, including cyclical stocks such as Alcoa, that could benefit from recovery, as well as firms in the infrastructure, transportation, and environmental sectors. However, Mr. Chalasani notes that 1992 may be a year where major market gains come early. Thus investors should exercise caution when acquiring individual stocks, he says.

One sector just starting to emerge from months of doldrums is technology. Dennis Jarrett, chief market analyst for Kidder, Peabody & Co., notes that there has been "heavy buying" in that area during "the past month or so." Both computer-systems stocks and electronic semiconductors are showing some upward momentum.

A final point on the election-year market: Experts who have studied the performance of the market in prior presidential elections say that the direction of stocks and stock sectors can help point to the ultimate winner.

Mr. Stack notes that in 5 of 7 cases this past century where the Dow Jones industrial average gained over 10 percent between January 1 and election day, the incumbent party retained the White House. In each of three cases where the Dow lost more than 10 percent in that period, the incumbent party was swept out of office. There is one other factor to watch, analysts say: consumer confidence. It has an immediate impact on retail stocks. According to Stack, the incumbent party has always held the White Hous e if consumer confidence rose in the 12 months before the election. In the two cases where consumer confidence fell, the incumbent party lost.