Interest rates are the gear by which the economic mechanism moves. When interest rates fall, borrowing gets cheaper. Debtors have more money, investments look more interesting and, eventually, business responds. Furthermore, I hate to bet against the economy in a presidential-election year. In nine out of the 11 such years since World War II, stocks have gained in value-often substantially. The only exceptions were the Truman election in 1948 and Nixon’s loss to Kennedy in 1960. The bond market gained in eight of those years, turning down only in 1956, 1968 and 1980.

Twice, recessions have lingered into the third quarter of a presidential election year-in 1960 and 1980-and incumbent politicians got the message. They could survive bad stock and bond markets, but never got re-elected in recessionary times. From which I infer that Republicans are as ready as Democrats to kick the economy into life.

Some analysts worry that tax cuts or new deficit spending will hike interest rates and knock business down. But as long as the stimulus is modest, it would deliver more punch-in new jobs and profits-than a half-point rise in long-term rates would take away, says Allen Sinai, chief economist for The Boston Co.

So what do you do in ‘92? Try this:

Stocks. Investors already have this one figured out. While the economy stagnated last year, they poured a record $31 billion into stock-owning mutual funds. The Dow Jones industrial average obligingly jumped 24.5 percent with dividends reinvested, and small-company growth funds nearly 44 percent (chart).

Since a year ago December the discount rate has dropped 50 percent. The last time that happened, in 1957-58, the Dow Jones industrials rose 51 percent over the next 15 months. The recent rally took the Dow up a mere 9.8 percent, suggesting that stocks still have romping room.

Falling interest rates cause investors to switch out of banks and money-market mutual funds and into stocks-but that carries the market only so far. For prices to rise without a break, the economy must improve. Market-timer Martin Zweig of The Zweig Forecast in Wantagh, N.Y., thinks the public romance with stocks is actually a bad sign. The two most recent buying binges were followed by a market crash (1987) and a market slump (1990).

Happily, some good economic news lurks in the bushes. Inflation is down. Housing sales have risen this year, especially in the South and West. Money growth is accelerating. For these reasons and more, the economy is nearer a turning point than the public generally believes, says Martin Barnes of the Montreal-based Bank Credit Analyst. One stumbling block: unemployment, which in Allen Sinai’s opinion will edge even higher in the first half of 1992. That would cheer bond investors who thrive in bad times and worry those invested in stocks.

But who can guess what pattern will prevail? Often, stocks slump early in election years, then recover later. The best way to invest in a seesaw market is to “price-average”–making regular additions to your mutual funds each month. That gives you more for your money during market drops and improves your total return.

As usual, every analyst of individual stocks has his or her favorites. Hugh Johnson, investment strategist for First Albany, says he’s buying technology companies and “cyclical” stocks like General Motors, which rebound when the economy does.

Bonds. Last year’s big successes were high-yield (yes: junk) bond funds. But don’t be misled by their huge success. They were bounding back from tremendous losses. To my mind, junk funds are for speculators only. If you want to play, John Rekenthaler of Morningstar Inc., a Chicago firm that tracks mutual funds, suggests funds that buy “quality junk”–Vanguard High-Yield and Financial Bond High-Yield.

U.S. bond funds in general attracted $63.4 billion in 1991, some of which came out of low-rate CDs. But bond funds do best when interest rates drop, and it’s doubtful how much farther they’ll fall. When rates do rise again, as typically happens in an economic recovery, bond funds will lose value, so investors should be prepared. But it’s a joke to try to forecast rates. (Q: Will interest rates go up or down? A: Yes, but not right away.) At current rates, bond funds should do better than CDs in the long term.

If you’re buying individual tax-exempt municipal bonds, today’s rates are attractive. There’s little risk to quality bonds, as long as you hold them to maturity.

Certificates of deposit. The one-year CD, now around 4.4 percent, looks like a loser. You can’t avoid low rates on savings you’ll need to use this year. But longer-term savings should be moved into stocks or bonds.

Your home. The best market for private homes last year turned out to be in the Midwest, where average prices for the first 11 months of this year rose nearly 5 percent over a year ago. Not coincidentally, median prices are lowest there-$77,700, compared with $139,500 in the West. Short-term, you can still lose money on a house. But you have a good chance of matching or exceeding the consumer price inflation rate if you hold for three years or more.

If you’re living in the blighted Northeast, you may wonder why the National Association of Realtors is reporting a mere 1 percent slide in sales prices there (chart), when so many homes are down by 20 percent or more. One explanation: the people most likely to sell are those who have a profit in hand. If you’re facing a loss, you may take your house off the market until prices firm.

Overseas. Contrarians should try mutual funds that buy foreign stocks, most of which disappointed their holders in 1991. Lately interest rates in Europe have been going up, depressing business, stock prices and profits. But some last-minute 1991 rallies on European bourses suggest that investors foresee a midyear resumption of economic growth–and international mutual funds are the best way to participate in it. The growth potential in Europe is much higher than that of the United States.

Over on the other side of the globe, investors in Japan have been taking their knocks for some two years. The Nikkei index lies at 23,000, down 40 percent from its peak in December 1989. But interest rates are declining there, encouraging S.G. Warburg Securities in London to call Japan one of the world’s most attractive markets. Martin Wade, the London-based president of T. Rowe Price’s top-performing New Asia Fund (which excludes Japan and yielded 19.3 percent in 1991), is bringing a new Japan fund to market. Wade thinks the other Asian countries will do a bit better than Japan next year, but he wants to be prepared. He also has some money in Mexico (up 122 percent this year, according to Morgan Stanley Capital International) and a bit in Chile (up 106 percent) and Argentina (up 403 percent).

Wade expects stronger growth in the Pacific than in Europe or the United States this year–a reminder to investors that, more than ever, it’s smart to diversify worldwide.

Recession or not, most people who put money in stock and bond funds last year had something to celebrate. Most produced double-digit increases, while money funds and CDs were sluggish at best.

INVESTMENT 1991 RETURN One-year CD 7.3% Private homes* Midwest 4.9% West 4.3% South 3.1% Northeast -1.0% Mutual funds + Small company 43.9% High-yield bonds 34.9% Growth stocks 31.8% Growth/income 25.3% Utilities 19.9% Bonds 17.2% World bonds 10.1% International stock 9.8% Money market 5.3% *11-MONTH AVERAGE, + DIVIDENDS REINVESTED. SOURCES: NATIONAL ASSOCIATION OF REALTORS, LIPPER ANALYTICAL SERVICES, BANK RATE MONITOR