1995 A Tough Act To Follow For Markets But Bears Rarely Run During Presidential Election Year

Here’s a thought to keep your expectations from getting too high as you make your savings and investment plans for the coming year:

All three major categories of financial assets - stocks, bonds and money-market investments - will be hard-pressed in 1996 to match their 1995 performance.

This forecast isn’t based on any gloomy view of the economy. It simply reflects the reality that the year now drawing to a close, an unusually generous one for investors, will be a tough act to follow.

Through the first 10 months of 1995, one commonly accepted gauge of stock-market action, Standard & Poor’s 500-stock composite index, returned just under 30 percent.

That’s almost double its average annual return over the past decade of a little more than 15 percent, as calculated by Morningstar Inc. in Chicago.

The Lehman Brothers aggregate bond index returned better than 15 percent from Jan. 1 through Oct. 31, more than 1-1/2 times its average return over the past decade of 9.91 percent.

The 10-year stretch from the mid-1980s to the mid-1990s has itself been an unusually good one for both stocks and bonds, encompassing a period of falling interest rates and improving internationally competitiveness for the U.S. economy.

So 1996 will also have to be unusually favorable for stocks and bonds just to keep them at or close to their recent pace.

Yields on interest-bearing money market investments have hovered in the 5 percent to 6 percent range through 1994. That’s about average for the past 10 years’ performance of this most conservative of the asset classes, which is exemplified by Treasury bills and money market mutual funds.

But most expectations are for the Federal Reserve to ease credit conditions in the months ahead, encouraging short-term interest rates to decline. So it would be no surprise at all if money-market investments returned less by early 1996 than they do now.

Nowhere is it decreed that events must follow these scripts. All the financial markets are prone to pulling surprises on everybody, and especially on the people who think they understand what’s going on.

But veterans of the game say it isn’t wise to expect above-average results from any financial market indefinitely.

A more modest return, however, would still be beneficial if the recent trend of inflation continues. The cost of living in this country has lately been advancing at a rate of about 3 percent a year or less, and it may slow further.

That leaves a “real” (inflation-adjusted) return on all categories of assets that bring in as little as 4 percent or 5 percent after taxes. It creates a favorable climate for paper investments, furthermore, by keeping inflationary pressures down in the competing markets for tangibles such as precious metals and real estate.

Another factor to consider: 1996 is a presidential election year, which usually means pretty benign conditions for the markets. Of all the serious bear markets for stocks over the past quarter-century - 1990, 1987, 1981-82, 1973-74, 1969-70 - none occurred in a presidential election year.