The Democrats may be in town, but Wall Street hasn't notice. Instead, investors have noticed a bull in New York and he's a Republican. The so-called "Reagan rally," which has been blossoming even since the former California governor snared the GOP presidential nomination, has become the leading topic on Wall Street.
Since May 21, the approximate date during which Ronald Reagan "went over the top" in delegates, the Dow Jones industrial average has soared more than 120 points, moving above 950, a 3 1/2-year high. Volume has been extremely heavy.
Although Mr. Reagan's candidacy hasn't been the only reason for the market's gain, Frank Parrish, portfolio manager for the $700 million Puritan Fund, part of the Fidelity Group of mutual funds, says, "There's no doubt that part of this rally can be attributed to anticipation of a new administration."
Monte Gordon, director of research for the Dreyfus Corporation, adds, "This is not a Reagan rally in the sense that Reagan is bound to have an impact on how the Democrats approach the election this fall." Already, Mr. Gordon says, President Carter's decision not to press for a tax cut this fall is indicative of the conservative approach he feels he must take to beat Mr. Reagan.
Wall Street, in fact, has been heartened by the calls from both President Carter and Mr. Reagan for a "reindustrialized" America. "We've become a second-rate industrial power," Says Larry wachtel, an analyst with Bache Halsey Stuart Shields Inc., "and it's time we did something about it."
If the candidates fulfill their promises to "reindustrialize" America, Wall Street is assuming that the place to be is in companies involved in the capital-goods sector as well as auto, aerospace, and high-technology companies. To date, the blue chips have performed well, although oil company stocks have not.
The rally has brought about comparisons to the London Stock Exchange, where prices likewise rose before Conservative Margaret Thatcher's election as prime minister. In fact, the Financial Times index rose to a record high before the election, but fell back later.
If history repeats itself, such a fate likewise may be in store for the US markets. William M. LeFevre, an analyst with Purcell, Graham & Co., notes that since World War II, if a Republican was elected, the market has tended to peak after the November elections. For example, after Richard Nixon was elected in 1972, the market peaked the following January. The market has historically fared poorly, however, during the first year of a Republican's administration.
On average, Mr. LeFevre finds, the market has declined 12 percent during a Republican's first year. Not since Calvin Coolidge has the market shown a gain during a Republican's first term. If a Democrat was going to be president, the market peaked before the election but often eked out a gain during the winner's first term. One of the few exceptions to this rule was in 1977 after the election of Jimmy Carter. The reason, Mr. LeFevre says, was that investors "didn't know what they had: a Democrat or a Republican dressed as a Democrat."
Even though the market has historically performed badly during the first term of a Republican, money managers are not distressed. "Over the long term," says one, "the Republican brand of economics will work out best."
Analysts are quick to point out that the market has rallied for other than political reasons. Mr. Gordon notes: "A lot of people are now saying the recovery will not be a strong one, and this bodes ill for inflation during the recovery. This could also help keep interest rates down." And, if the economy has already begun to bounce back, Mr. Gordon reasons, then "corporate profits aren't going to disappear."
A further stimulant to the market is the huge cache of cash sitting on the sidelines. Institutional investors now have about 15 percent of their funds sitting in cash or cash equivalents. An even larger sum, $81 billion owned, sits in money-market funds drawing 8 1/2-percent interest. Individuals could withdraw their money quickly from these funds and sink it into the stock market.