Party Time For Investors

The election has spurred a huge rally. Here's what may stay hot

President Clinton is back. Republicans still hold the Hill. The question for investors: How to play this divided election for a profit.

The initial reaction from the markets was euphoric. The Dow Jones industrial average climbed nearly 40 points on Election Day, Nov. 5, and nearly 96 points the next, to hit a record 6178. In the bond markets, the yield on 30-year Treasuries fell to 6.58% on Nov. 5, their lowest in almost seven months. How long can such an election rally last? If history is a guide, not long. Since 1926, the Standard & Poor's 500-stock index has returned about 7% during the first year of every Presidential term.

Don't bail out of the markets yet, though. Contrary to conventional wisdom, many stocks fare well under Democratic Presidents. Since 1937, small-cap stocks have risen an average of 17.2% annually under Democrats, vs. 10.2% under the GOP, according to a study by Liberty Financial Cos. And the bond market will be watching the new split government carefully. If Washington indicates that a real effort to shore up Medicare and Social Security is under way, bonds may rally more than now expected.

Looking for stock-picking advice for a second Clinton term? With a government divided, analysts figure companies with solutions to problems of bipartisan concern are the safest bets. One good example: education companies (table). When Congress adjourned in October, Republicans had agreed to nearly $4 billion in spending on educational initiatives proposed by Bill Clinton. "President Clinton wants to be remembered as the `Education President,' so this is going to be a major theme going forward," says Robert Froehlich, chief investment strategist for Van Kampen American Capital Inc. in Chicago.

Companies that specialize in educational services likely will benefit from proposals to fund tutoring for at-risk students, remedial literacy training for elementary-school children, and privately managed public-charter schools, says Lehman Brothers Inc. political analyst Kim Wallace. And if the Administration makes good on its promise to wire schools to the Internet, Net software providers may be a buy, including Sun Microsystems Inc. and Netscape Communications Corp.

Tech companies, with products that help cut costs and boost worker productivity, also could get a lift. Money managers, including James M. Weiss at State Street Research & Management Co. in Boston, predict that corporations will invest heavily in such gear to offset the costs of increased regulation under Clinton.

The cost-cutting trend may also help some health-care stocks. Initially, such offerings may suffer from the expected formation of a commission to reform Medicare financing. But longer term, figures Bear, Stearns & Co. investment strategist Elizabeth J. Mackay, generic-drug makers and HMOs experienced in dealing with Medicare will do well.

"BLOWN AWAY"? Defense companies may also profit, now that military budget cuts seem to have abated. "You'd be early if you started to buy now," says Bob Goodman, senior economic adviser at Putnam Investments in Boston. "But demand will pick up over the next five years when a lot of equipment will need to be replaced."

What to avoid? Tobacco stocks. They will be hit by further antismoking initiatives under Clinton. Van Kampen's Froehlich also suggests avoiding mining and forest-products companies, which are likely to face more stringent environmental regulations. Of course, more than politics will determine if such predictions are right. "Even if you invested in all the areas Clinton seems to be interested in and were right, you might still get blown away by the market environment," says Thomas McManus, a Morgan Stanley & Co. strategist. Maybe. But this election has some clear buying opportunities.

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