One Last Gasp for the Bull Market?

Even some of Wall Street’s biggest naysayers on stocks say the market could enjoy one final big rally before it stumbles into a full-fledged bear phase.

Why a “last gasp”? First, a shift by the electorate to mostly Republican candidates in Tuesday’s election could thrill the market at least temporarily by promising a turn to the kind of conservatism that Wall Street normally applauds--lower taxes, smaller government, a stronger military.

The fine print entailed in such a conservative turn--for example, the potential for a bigger federal budget deficit--would probably be ignored in the initial euphoria over a Republican win, some analysts figure.

Second, the December-through-January period is traditionally strong for the stock market, as investors generally approach the new year with optimism. Stocks beaten down in tax-related year-end selling often are snapped up by bargain-hunters in late December and in January.

Third, because many stock portfolios (including the typical mutual fund) are down only slightly this year, fund managers haven’t suffered enough psychologically to prejudice them from jumping aboard any rally that might get started.

In fact, with managers’ bonuses dependent on their performance, any opportunity to post a gain this year will probably be seized upon. “If you see someone else doing it (leaping into stocks), you’ll have to do it too,” says Michael Kucera, research chief at Wedge Capital Management in Charlotte, N.C.

But with stocks’ price-to-earnings ratios at levels that at best indicate a fair valuation for the market and at worst indicate overvalue, any surge in stock prices from current levels will merely heighten the risk of a deeper decline early in 1995, Wall Street bears say. Their simple message is that it isn’t worth trying to get on board for another 5% gain, if a 15% decline will soon follow.