PRESIDENTIAL PLAYS

Lost interest? Too lazy to vote? Go ahead, channel surf around those annoying political ads and sleep late next Tuesday. Wall Street’s already held the election, tallied the ballots and staged the victor’s champagne bash to boot.That’s a big part of what’s been going on in the stock market since Labor Day. Sure, corporate profits have been humming, and low interest rates have provided punch. But if investors weren’t content with the nation’s political backdrop it’s unlikely stocks would have risen as they have. The Dow Jones industrial average, after sweating through a deadly dull summer, has danced 7% higher in two months and bubbled past 6000.

The question is, Do the pollsters on Wall Street have it right? If so, investors needn’t think much about their portfolios. The postelection political setting will be like the current one, which has worked miracles. The Dow is up 64% since the midterm election in 1994; the average diversified-stock mutual fund, up 47%. That dwarfs normal returns of 11% a year from stocks. Challenger Bob Dole is whining about the economy, but he’s a lonely voice. Inflation is low, unemployment is down, the budget deficit is shrinking and the economy is growing.

“Blessed gridlock,” explains Mark Melcher, director of Washington research for Prudential Securities. Good things have happened because the Republican Congress hasn’t let Clinton tax and spend as he might like. And Clinton hasn’t let Republicans cut taxes and possibly drive up the budget deficit and interest rates. That status quo looks like it will survive.

Only the prospect of a Democratic legislative sweep could unnerve the Street–but that’s just what started to happen last week, as Dole stepped up his “character” assault on Clinton, only to step on his own toes in the process. If Dole turns mean, Clinton might inspire voters to give Demo-crats the seats they need to control both arms of Congress. “If the Democrats sweep, it would be a tax-and-spend mandate,” Melcher says. “The bond market would go first and the stock market would follow.”

Consider too that Wall Street has an abysmal record on predicting politics. In 1992, for example, stocks of health-maintenance organizations soared as Clinton gained momentum. Wall Street assumed his reform measures would bring a business bonanza to cost controllers in health care. But it didn’t work. Since Clinton’s win, HMO stocks have lagged. Although health-care inflation has moderated, Clinton never achieved the reforms the market expected.

A larger snapshot is equally revealing. Since 1928, the Standard & Poor’s 500, a broad market gauge, has risen 5% or more in the three months preceding a presidential election on six occasions: 1928, 1936, 1940, 1968, 1972, 1980. It’s doing that this year too. Amazingly, in all six cases, the S&P 500 fell during the 12 months immediately following those elections–by a whopping average of 12%, reports Logical Information Machines, a market-data firm based in Chicago. Obviously, the market misinterpreted something. Is today’s surging market misinterpreting again? It’s a cinch you shouldn’t bank heavily on Wall Street’s political handicapping. As always, they still have to play the game.