(MONEY Magazine) – As the Dow has struggled toward the 4000 mark, market forecasters have turned astonishingly gloomy. It's now conventional wisdom that stocks are on the brink of at least a 15% loss. In general, investment advisers are more pessimistic than they have been since 1982. (For the views of one downbeat forecaster, see Newsline on page 14.) We are not part of the doomsaying crowd, however. We certainly agree that resurgent inflation and rising interest rates are legitimate worries for investors. But we also believe that the worst is almost over -- and that many shareholders will be pleasantly surprised next year. Here is the case for our somewhat more optimistic view: For starters, 1995 is the year before a presidential election year. That fact has consequences (see the chart at right). Administrations naturally try to rev up the economy in the 18 months or so leading up to an election by boosting government spending and leaning on the Federal Reserve to limit interest-rate increases. In any four-year presidential term, the stock market typically turns in its best results in year three. Of course, we'd be foolhardy to base a stock market forecast entirely on a historical pattern, even if it is a fairly regular one. Here are the other reasons we think 1995 will shape up as a double-digit year for stocks: -- The U.S. economy is the strongest in the world. In September, the World Economic Forum, a Swiss research institute in Geneva, rated the U.S. tops for competitiveness among 41 industrialized nations. -- Inflation isn't as bad as most economists think. It's true that commodity prices are jumping; that's why we told you in our September issue to take a look at inflation stocks. But labor costs are currently rising at only a 3.4% annual rate and are up less than 1% over the past year. You don't get serious inflation until you have labor costs rising at rates above 5%. -- The Federal Reserve won't need to raise interest rates much more. The Fed has increased interest rates five times since February in order to rein in the economy and muzzle inflation. We think that those rate hikes will soon start to take effect. The Fed may have to raise short-term rates once or twice more to the 5%-to-5.5% range within the next six months. However, we don't think you'll see rates steadily ratcheting up throughout 1995. -- As corporate profits have grown, stocks have become cheaper. The Dow is no higher today than it was at the beginning of the year, but the average profits of the Dow stocks have risen 17%, bringing the Dow's price/earnings ratio down to 15.4, about in line with historical norms. Once the economy eases into a comfortable 2.5%-to-3% growth rate, we think that investors will start bidding up share prices again. For an analysis of the 25 biggest mutual funds, turn to the cover story on page 72; for 10 promising stocks, see Wall Street on page 62. In fact, once investors have become convinced that interest rates have plateaued, they will begin focusing on companies with rapidly rising earnings. And the many stocks that can steadily turn in profit increases of 10% or more in 1995 will reward their shareholders with double-digit gains.

CHART: NOT AVAILABLE CREDIT: Source: Ehrenkrantz King Nussbaum CAPTION: STOCKS EARN THE MOST IN PRE-ELECTION YEARS Share prices could post double-digit gains in 1995, since stocks score the biggest gains in the year before a presidential election year. The chart shows the average rise in the Dow in each year of presidential terms since 1901.