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Markets Await Election Results

There's little doubt that the stock market's health is tied in some fashion to President Clinton's political fortunes. That makes elections on Tuesday - or more specifically, the possibility of a GOP sweep - key for investors.

Stocks at times have shown a tendency to move higher over the last two months when President Clinton has a particularly good day and takes the upper hand away from the Republicans. And the indices will head south when impeachment starts to look likely.

For now, folks in Washington are assuming the Republican party will pick up 10 seats in the House and 3 in the Senate, said Tom Gallagher, who heads Lehman Brother's Washington, D.C., research team.

"In a way it's kind of ironic because the policy implications (of the election) kind of run counter to the impeachment outlook," said Gallagher.

"On the impeachment outlook, the better the Republicans do, the more likely the country gets plunged into the impeachment (process). On the policy said, the better the Republicans do, the more the markets like the policies," he said.

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Election ramifications for the bond market, however, are different. On the policy side, the more seats the GOP picks up on Tuesday, the greater the likelihood for a tax cuts. And that's not so great for bonds. The bond market wants Washington to use that budget surplus to retire some U.S. debt. Republicans would like to use some of the surplus to pay for tax cuts.

"There could be a setback for bonds if the Republicans have a good day," Gallagher said.

"Markets love this wondrous balance, because the two (GOP on the Hill and a Democrat in the White House) cancel each other out. The bond markets like the fact that we've had this balance in particular," said Chuck Gabriel at Prudential Securities.

Beyond the elections, the cominweek is shaping up to be a rocky one with a bevy of economic indicators set for release, including the National Association of Purchasing Management's index of manufacturing activity in October.

On Monday, the association reported its monthly index of business activity fell to 48.3 percent last month from 49.4 percent in September. Any reading under 50 percent is a sign of contraction in the industrial sector.

Overhanging almost all other policy issues, of course, is the direction Social Security reform. An overhaul of the system could send billions a month to the stock market.

But the fortunes of two sectors most closely tied to this election are Health Maintenance Organizations (HMOs) and Big Tobacco. In brief, a Republican victory would be considered a boost for the two, while a Democratic turnaround would carry negative implications.

Wall Street's giants will pay attention in particular the close U.S. Senate race in New York, where Republican Sen. Alfonse D'Amato is facing a strong challenge from Democrat Chuck Schumer.

"Personalities really do matter down here," Gabriel said. "We've got ten really close Senate seats."

D'Amato is chair of the Senate Banking Committee, and should he lose, Republican Sen. Phil Gramm would take the post. Gramm killed a financial modernization bill in a spat over the Community Reinvestment Act with Democrat Carol Mosley-Braun.

And on that bill lie the global ambitions of a Merrill Lynch (MER) and the final blessing for insurance and commercial bank mergers like a Citigroup (CCI).

"Merrill badly wants this bill to expand in Europe, " said Gabriel. "This is the bill that will make the insurers the 0takeover play in the financial sector as were the brokerages for the last three years."

Written by Emily Church

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