Economic Weakness Jolts Stock Market

HALLOWEEN has come early to Wall Street this year. Apprehensions about weaknesses in the United States economy, the European currency crisis, and uncertainties about the outcome of the presidential election are combining to push stock prices southward.

"Whenever you have as many uncertainties and difficulties coming together at once, as is now occurring, the investment community gets very panicky," says Larry Wachtel, a vice president with Prudential Securities Inc.

"First, if you have a weak Friday, then it's almost certain you'll have a weak Monday," Mr. Wachtel notes. On Friday, Oct. 2 the stock market tumbled 54 points, with the Dow Jones industrial average closing at 3200.61 points. Then on Monday, Oct. 5, the market temporarily fell through the 3100 point level, which many market technicians had seen as a "support" level. The market finally closed at 3179, down 21.61 points, its lowest level in nine months. Uncertainty hits stocks broadly

However, it is not so much the current day-to-day gyrations on the Dow that are haunting Wall Street as a general skittishness about the basic trend of the market. "October is known as the `bear market killer month,' " says Gene Jay Seagle of Gruntal & Co., an investment house. At least six of the 10 worst stock market declines have occurred in the month of October, including the historic market crashes of 1929, 1987, and 1989. On Oct. 19, 1987 the worst recent major downturn, the market plummeted some 5 08 points, losing 23 percent of its value in slightly over six hours.

"But I don't think this is October 1987," says Mr. Seagle. "In September 1987, the Federal Reserve Board increased the discount rate," which had the effect of pushing up interest rates. "Now the Fed is going the other way, cutting rates. With current low interest rates, combined with the inability of investors to get adequate returns on alternative forms of investments, such as bonds, money market accounts, and certificates of deposits, the stock market is still the place to be. And continued instability

in Europe will draw more foreign money into the US market."

The addition of Ross Perot into the presidential election, plus the possibility of a change from a Republican to a Democratic White House early next year, are clearly factors helping to spook the market, according to many analysts.

"The stock market does not like uncertainty," and the addition of Mr. Perot to the Clinton-Bush matchup has helped scramble the market, says James Stack, publisher of InvesTech, a newsletter.

But Mr. Stack says that Wall Street is not moving into a new bear market. "The Fed remains in an aggressive easing mode," he says, noting that the Federal Open Market Committee was meeting Oct. 6 and 7. "Central banks in Europe will be easing [rates] in the months ahead, including the German Bundesbank," Stack says. Tight monetary policies

Stack says that much of the global economic difficulty can be traced to tight monetary policies - particularly in Europe - since 1989. Only the US, Canada, and to an extent, Japan, he says, have taken aggressive steps to lower interest rates. Yet France, Germany, Switzerland, and Britain continue to have a "negative yield spread, with short-term interest rates higher than long-term interest rates," causing an economic slowdown.

Stack also notes that many investors continue to worry about a victory by Bill Clinton. "There's a feeling that interest rates will automatically head back up if the Democrats are elected," he says. But Stack's studies show that in most presidential elections, interest rates tend not to rise the first month or so, no matter who is elected.

Stack says that there are at least three "warning flags" for investors to watch regarding the immediate direction of the economy and the stock market: the next consumer confidence report, due out on Oct. 27; the report by the National Association of Purchasing Managers on Nov. 2; and the next housing-start report on Oct. 20. Especially bad reports, he says, could suggest that the economy is slipping back into recession.

"This is certainly a stock market correction," but it's not a market plunge, says William Raftery, who heads up technical research for Smith Barney.

Mr. Raftery notes that the market is shifting away from an emphasis on consumer companies to capital goods firms. But that means, he says, that the market will eventually shift back into gear.