Sideways Toward the Election

The year 1976 started off so strongly on Wall Street that market analysts all but unanimously thought stock averages would push to record highs. As late as June, there were hopes that the rise would occur during the summer. Instead, brokers and investors have been sunning themselves on beaches, and hopes for a summer rally have finally disappeared in the past two weeks. Prices have drifted sideways on light volume during most of the hot weather, and are now ending the dog days with a downturn. The Dow Jones industrial average two weeks ago fell 33 points, following Robert Dole's selection as President Ford's running mate--a move some nervous investors saw as increasing the chances that the Republican ticket would lose. Last week the Dow fell another 10.14 points, to a close of 963.93.

Chance for Indecision. Even that drop, however, has so far failed to break a prolonged deadlock between bulls and bears. At last week's close, the Dow was still within the exceptionally narrow range of 954.9 to 1011, in which it has held since February. The stalemate has given the year on Wall Street a very strange pattern: a cyclonic rise in January and February, during which the Dow rose more than 120 points on record trading, followed by six months of generally lackluster volume and back-and-forth price movements that rarely last more than a week or two and cancel each other out. The current drop could end the seesawing, but the betting on Wall Street is against it. What analysts are beginning to call the "Ford-Carter market" will provide investors with rich new opportunities for indecision.

Dozens of subtle influences--investors' perceptions of who wins or loses the television debates between Ford and Carter, the candidates' standings in the polls--will push the market back and forth through the campaign. Republican Wall Street does not fear Carter, but it would like Ford to win; above all, it would like to know the outcome. Says William W. Helman, chairman of the investment committee of Smith Barney, Harris Upham & Co.: "There's a greater amount of uncertainty now about who is going to win, and the market doesn't like uncertainty." Market historians note that election campaigns usually are times of minor price movements. During the past seven presidential campaigns, from mid-August to Election Day the Dow has risen three times and dropped four; in no case has the swing been as wide as 10%.

If the sideways movement does continue, it will be good news for Ford. A traditional "rule of the Dow" holds that if the average is higher on Election Day than on Jan. 1, the party in power will stay in office; if it is lower, the outs win. The rule has held good in 15 of the 18 presidential elections since 1900. It would take a disastrous drop now to push the Dow by Nov. 2 below its start-of-the-year level of 858.7.

More sideways movement would be less welcome to investors who have had no opportunity to ride any sustained trend since midwinter. One reason for the long lull is that big institutional investors--banks, pension funds, mutual funds, insurance companies--are fully invested; they put most of their money into stocks or bonds during the hectic winter rally, leaving themselves with little cash for additional investments that could make the market go forward. Those institutions so dominate the market--they account for 70% of the dollar volume traded on the New York Stock Exchange--that they create seesaws by buying on favorable economic news one day and selling on less good tidings the next. Recently, for every jitter about the economic recovery--the current slowdown in consumer spending, for example, or a threatened rise in interest rates--there have been such offsetting pieces of cheer as gains in employment, real income and building permits. Thus the averages bounce around erratically. In the middle of last week's decline, for instance, the Dow jumped 7.9 points one day in response to a prediction by General Motors Chairman Thomas A. Murphy of record car sales next year (see following story).

Wait and See. There is some evidence, too, that the seesawing of the Dow overstates the amount of back-and-forth activity in the market generally. Professional money managers, discouraged by past vain attempts to "beat the averages," are now largely content to match the performances of the leading indexes by trading in the stocks that make up those averages. Thus the 30 blue chips in the Dow Jones industrials have moved around more in price than most other issues. All in all, a year that started with brave predictions of 1100 or even 1200 on the Dow has turned into a year of essentially flat prices. While no one can ever predict the market, most Wall Streeters expect the wait-and-see attitude to continue at least until the voters make their choice in November.

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