A campaign's promise

Wave the flags. Red, white, and blue ones - not white ones, despite a rough second quarter for mutual funds. The 2000 election season is about to gain speed. And for US equities markets, there is nothing like a presidential race to help propel stocks to new gains.

Since 1952, when Dwight Eisenhower won the White House, markets have rallied during election years.

The Dow Jones Industrial Average, for example, has reached a new high, or come within kicking distance of a record, in every election year but one since Ike. That was the recession year of 1960. But in eight elections, including 1996, the market soared to new highs. In all the rest, the Dow finished out just a few percentage points behind the current high.

Type of fund 2nd qtr. 1-yr.

+ Health/Biotech 18.2% 67.7%

+ Real Estate 10.6 2.1

+ Natural Resources 3.9 15.3

- S&P 500 Index -2.9 6.6

- Pacific Region -12.3 23.3

- Telecommunications -13.9 32.4

And if that doesn't establish at least the hint of a positive pattern for the remainder of this year, take a longer look back.

According to James Stack, editor of InvesTech, a financial newsletter published in Whitefish, Mont., in 22 of the 28 presidential elections held since 1888, the Dow has either set a new high or come within 2 percent of the high by the end of the year.

The upward thrust of the presidential-election-year cycle is one of the few Wall Street truisms that "is actually true," says Mr. Stack. Election fervor, it seems, translates into renewed confidence among voters in the American way of life - and business.

Now, before millions of investors and market aficionados race out to boost their holdings in stocks and mutual funds, it is important to note a few caveats:

*The market highs have almost always come in the fourth quarter, sometime after Labor Day. Sorry. Summer months can be nail-biting times for stock markets.

*In almost all presidential elections, the Federal Reserve has tended to get out of the way in terms of making changes in monetary policy. In only one election since the Fed was created in 1913 has there been an interest-rate hike within two months of an election, Stack notes. The exception, 1980, saw the defeat of the incumbent administration of Jimmy Carter.

But the year 2000 "is different," Stack says. This year the Fed has repeatedly boosted interest rates to dampen inflationary pressures. Fed policymakers will meet again in late August, one week after the Democratic convention.

Will the Fed stay on the sidelines, or, going against its own tradition, lift rates against the backdrop of the election? Many Wall Street watchers believe that the so-called "futures market," which anticipates money trends, is now "pricing in" one more rate hike of a quarter of a percentage point.

But other analysts, such as Bruce Steinberg, chief economist for investment house Merrill Lynch & Co., believe that the Fed's tightening is probably over for this cycle.

*While the election year has mostly been an up year for investors, the year after the election has tended to be less happy, including a disproportionate number of recessions.

One reason: Both Fed policymakers and newly elected administrations have preferred to get economic difficulties out of the way as soon as possible, which has usually meant the first year of the four-year cycle for the White House.

*Finally, despite the upward thrust of the election-year market, the third quarter, which we have now entered, is often either mediocre or a downer.

"During the past 10 years, the third quarter has been a difficult period for investors," says Arnold Kaufman, editor of The Outlook, an analytical review published by Standard & Poor's.

For the next three months, investors should be patient, though watchful, Mr. Kaufman says. "We think the market will kick back in as we approach the political conventions and the election itself, in November. We see the market hitting new highs. The S&P should close the year at a record 1570 points, up around 8 percent for the year," he says.

The high on the S&P 500, so far this year, is 1527 points, Kaufman notes.

Abby Joseph Cohen, chief investment strategist for investment house Goldman Sachs & Co. and a prominent "bull" on Wall Street, also sees the S&P 500 ending the year at a high of around 1575. It should hit 1625 by spring 2001, she says.

Still, even an 8 percent gain for the market should look appealing to investors, who have taken a shellacking for the first half of 2000. All major market indexes are down through June 30. The average diversified US stock fund was down about 3.5 percent in the second quarter, according to Lipper Inc.

If the first quarter was marked by roller-coaster turbulence, the second quarter was characterized by a "vague" drift, says Larry Wachtel, a vice president with investment house Prudential Securities Inc. "Vagueness" continues to characterize the market, he says. But as voters start to take notice of the candidates, that should have an energizing effect, Mr. Wachtel says.

"This election should prove to be far more Wall Street friendly than past elections," Wachtel says. "The difference is that now just about everyone owns stock of some kind," either directly, or in mutual funds through retirement accounts.

"The voters and Wall Street are now one and the same," says Wachtel.

He sees the market rising later this year, and closing out the 2000 calendar up somewhere between 8 and 10 percent. That would mean a return to more traditional gains, rather than the double-digit returns of the last half of the 1990s, Wachtel notes.

For the second quarter, the big gainers for mutual-fund investors were to be found in healthcare, biotechnology, real estate, and energy issues. They continue to do well. Internet firms, big winners in 1999, bit the dust and largely remain there. (Story, page 18.)

Don't overlook selective value stocks during the rest of this year, argues Marshall Acuff, chief strategist for investment house Salomon Smith Barney. He is keen on oil-service stocks and defense stocks, since spending on military projects is expected to rise.

Defense-related stocks are often beneficiaries of election-year patriotism. This year, in particular, defense is expected to be a major campaign issue.

"In many ways, the year 2000 is like the year 1999," argues David Andelman, editor in chief of an investment-analysis Web site (www.smallcapcenter.com).

Last year investors were faced with market dips early in the year, followed by summer doldrums and a fourth-quarter rally, Mr. Andelman says.

He sees that happening again this year, especially if the Fed either steps out of the way, or limits itself to perhaps one more rate hike. "The market should rally going into the last part of the year," he says.

(c) Copyright 2000. The Christian Science Publishing Society