Ever since World War II, stocks have always risen in a presidential election year-two thirds of those years at a double-digit percentage pace. But this time, even the optimists are capping their Dow forecasts at 3600. That’s up 9.6 percent from last week’s 3285 close-low, compared with the prospects overseas. Now more than ever, you should add foreign stocks to your regular investment plan.
Individuals decidedly favor U.S. stocks. In the six months ending in April, a record $68 billion flooded into stock-owning mutual funds, much of it fleeing low-interest bank accounts, money-market funds and similar investments. Low inflation and short-term interest rates should continue to support the market, at least through summer, says Gail Dudack, market strategist for S.G. Warburg in New York. Compared with 4.2 percent on one-year treasuries, a shot at 9 percent looks good.
And that’s just in the industrial stocks, that track the recovering economy. Earlier this year, while the Dow stocks were rising, the broader market fell into a funk. Standard & Poor’s 500 stock average now lies 4 percent under its January peak. The smaller, over-the-counter stocks are off 14 percent since February. But fund managers, up to their kneecaps in cash, are still shopping on weakness-in sectors like drugs, housewares and specialty retail stocks. If growth stays slow enough to let long-term interest rates tick down, the S&P 500 could climb by 12 percent this year, Dudack says, carrying with it the broadly diversified mutual funds.
That pretty much sums up the optimists’ case. Just below them on the mood chain comes a group one might call bulls-in-transition. Consider Martin Zweig, of the respected Zweig Forecast in Wantagh, N.Y. His forecasting system still flashes go, but the equity portion of his portfolio has been pared to 36 percent. Zweig thinks that stocks are overpriced, relative to their dividends and expected earnings. A “neutral” today is Gerald Appel of the top-performing, market-timing newsletter, Systems and Forecasts, in Great Neck, N.Y. He sees stocks as stagnating, probably dropping no more than 5 to 7 percent. “Crashes start when interest rates are high,” Appel says, “not when they’re as low as they are now.”
True pessimists are currently hard to find, but their case is strongly put by Steve Leuthold of The Leuthold Group in Minneapolis. “Get real,” he tells plungers whose minds can’t think past the rich 1980s. The period just ended was the second best in all stock-market history, outdone only by the late 1940s and the 1950s. Anyone looking for a repeat performance, he says with his usual understatement, “belongs in a mental institution.”
Leuthold backs up his view with some sobering facts. Since 1926 the ratio of stock-market prices to earnings (smoothed out to eliminate cyclical distortions) reached the same high peaks they’re at today in 26 different quarters. Had you bought at the end of any of those quarters, your average annual return over the next 12 and 36 months would have been only 3 percent. Had you held for 10 years, you’d have earned a mediocre 6 percent annually, dividends included. So today’s 10-year treasuries, at a riskless 7.3 percent, are potentially a better buy. Aggressive investors might try mutual funds that buy high-yield Gunk) bonds, advises Norman Fosback of Market Logic in Ft. Lauderdale, Fla. They’re yielding in the 10 to 11 percent range. As business improves, the risk of junk-bond defaults declines, and their price goes up.
Leuthold’s sell signal flashed in April. Of 18 such signals since 1960, only four were false alarms, he says. The others foresaw price drops in the general range of 25 to 30 percent. What would make Leuthold wrong this time? Persistent investor confidence, he says, defined as a blind faith that cash is still trash and that stocks should always be bought on weakness. What would undermine confidence? An unanticipated or threatening event. One such might be a Perot candidacy that picks up strength (Wall Street hates uncertainty). Another could be a softer economy toward year-end. This year’s huge budget deficit gave the economy some support; the president even ordered six government departments to speed up $9 billion worth of spending to cram more growth into 1992. But when spending wanes, it’s not clear that business and consumers will be able to pick up the slack, says Hugh Johnson, chief investment officer of the First Albany Corp. Another reason to be wary: more often than not, stocks sag the year after the election.
Regular monthly investors in U.S. stocks needn’t give up the ship; by buying in both bad markets and good, you get a lower average cost and better returns. But another investment rule is to buy in recessions. That describes much of Europe, says John Hickling, who manages several Fidelity foreign-stock funds. When Germany’s high rates of interest subside, stock prices should rise across the continent.
Here’s a trio of regional mutual funds: T. Rowe Price’s European Stock Fund, up 7 percent since January, Vanguard’s Index-Europe, up 6.7 percent and Fidelity Europe, up 8.6 percent. Among closed-end funds, which trade on the stock exchange and are bought through stockbrokers, take a look at the Emerging Germany Fund, priced at 16 percent below the current value of the stocks in its portfolio, and the New Germany Fund, at 15 percent under value. Both invest in smaller and medium-size companies. For blue chips, try the Future Germany Fund, at a 16.5 percent discount. For a bet on two of the world’s cheapest markets, get the Growth Fund of Spain and the Italy Fund.
Hickling also suggests an Asian fund with some Japanese stocks, now that the Nikkei is 59 percent under its 1989 peak. Suggestions: Fidelity Pacific Basin, G.T. Pacific Growth and Merrill Lynch Pacific. In the old days, a doubter had to sit on the sidelines when the market looked poor. Today, there’s always a buy somewhere in the world.
