Stock Market Warily Watches Earnings and Elections

The US stock market, which soared to a historic high between mid-July and mid-October, suddenly seems spooked by two Halloween-week goblins.

Many investors believe future corporate earnings will not equal hefty returns posted earlier this year, particularly in the third quarter. As a consequence, some investors are selling shares and pulling out of the market.

Second, concerns are growing within investment houses that President Clinton might sweep a Democratic Congress into office next week, or at least, a Democratic House of Representatives. Wall Street generally favors the status-quo - a Clinton-led White House and a Republican Congress. Divided government is seen on Wall Street as best ensuring that deficit reform remains high on Washington's political agenda.

After reaching an all-time high of 6094.23 points on Oct. 18, the Dow Jones industrial average struggled to remain above the 6000 point level last week. On Friday, Oct. 25, the market closed at 6007.02 points.

Ironically, the thrashing about in the market last week - with the Dow wobbling up and down - came against a backdrop of generally favorable third-quarter corporate earnings reports. Among companies reporting strong earnings were Boeing and Procter & Gamble. But analysts said a 1.4 percent decline in revenue at Procter & Gamble hinted at slower future revenues and earnings.

"A lot of investors have apparently used the high [third-quarter earnings reports] as a justification to sell," says Kenneth Gehl, manager of equity marketing at investment house Everen Securities Inc. in Chicago.

"Investors are saying, 'how much better can these [future] earnings be,' " says Gene Jay Seagle, president of Tactics & Technics, a consulting firm in Weston, Conn.

"We think there is every reason to expect earnings growth to slow in the fourth quarter and into 1997," says Arnold Kaufman, editor of "The Outlook," a financial review published by Standard & Poor's Corp. The research firm expects earnings to rise 5 to 10 percent this year, over 1995 levels; but earnings in 1997 could be "flat."

STILL, Mr. Seagle says the "overriding focus" on Wall Street last week was the Nov. 5 election, more than earnings. Many investors would "be rather upset" if there were to be a Democratic takeover of Congress, Seagle says with deliberate understatement. A number of prominent investment strategists raised just such a possibility last week. They are concerned that the new Democratic chairmen of many House committees would be to the left of Mr. Clinton politically, and would nudge government spending and national economic policy in that direction. Such concerns may be exaggerated. For one thing, political analysts say it will be difficult for Democrats to recapture the Senate.

That the November election is a watershed for Wall Street is suggested by a total lack of consensus about what happens to financial markets - and the US economy in general - immediately afterward.

Standard & Poor's, for example, predicts 1997 will be "tough" for financial markets. "First years of a second term are always difficult," Kaufman says.

Everen Securities anticipates a market correction in the weeks ahead of about 5 percent.

Seagle says the market could hover around the 6000-point level and then move up to 6500 in 1997.

Larry Wachtel, a vice president of Prudential Securities Inc., predicts the pace of the market will slow, since the recent massive surge in the Dow is "unsustainable." But the market will continue to advance upward he says, although perhaps at a rate of "two steps up, one back."

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