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updated 3/21/2004 3:48:01 PM ET 2004-03-21T20:48:01

The nervousness that has characterized stock trading over the past week could carry on into this week, Wall Street analysts say, as investors continue to worry about a handful of issues, including an unwelcome increase in geopolitical tensions.

Major Market Indices

Wall Street has seen an orderly pullback in share prices in recent weeks after a yearlong bull run, but recently that decline has been exaggerated by a sudden increase in security fears. Each of Wall Street’s main stock indices ended a choppy week on the downside last week, as stocks retreated further from their long-time highs set in the previous two months.

Jittery investors were buffeted by the repercussions from a series of devastating train bombings in Spain in the previous week and by news of the near capture of al-Qaida’s second-in-command, Ayman al-Zawahri, by Pakistani troops fighting near the Afghan border.

Last Monday, for example, the Dow Jones industrial average fell 137 points to a fresh low for the year on the heels of news that the al-Qaida terrorist network may have been involved in the Spanish bombings. But by Wednesday’s close, the index was 197 points higher, lifted by the Federal Reserve’s suggestion in its policy-meeting statement that it is in no hurry to raise interest rates.

With an increase in terrorism activity and the first anniversary of the U.S.-led war in Iraq, the stock market is once again at the mercy of geopolitical world events said Steve Stanley, chief economist at RBS Greenwich Capital.

“Ultimately, U.S. stocks probably won’t react violently to anything short of another attack on U.S. soil, but we saw a reaction to the bombings in Spain and the possibility of the capture of al-Qaida’s second-in-command, so these things have an impact,” he added.

Wall Street could see something similar this week said John Caldwell, chief investment strategist at McDonald Financial Group. “We could see more of the same back and forth, somewhat directionless moves, on light volume, in the absence of any expected news."

Aside from terrorism, in the near term another set of issues is weighing on stocks, say analysts, and these economic spoilers include a persistently weak employment picture, first-quarter earnings and the November presidential election, which is still a long way off but already rocking the financial boat.

Now that U.S. Senator John Kerry looks likely to run against George W. Bush, professional money managers are beginning to ask which candidate will be most beneficial for stocks and the economy. Many think a Kerry presidency could be bad news for stocks according to Steve Stanley.

“The 2004 election presents stark choice for the stock market,” he said. “Bush has championed a series of tax cuts, so there are lots good things there from a fiscal standpoint, but Kerry wants to undo some of those tax cuts, so if the stock market prices in a Kerry victory it could be a negative scenario,” he added. Video: Latest market news

The rising cost of energy is also set to become a headache for investors in coming weeks, say analysts.

Crude oil prices hit a 14-year high last week due to dwindling stockpiles and also because of concern over U.S. gasoline supplies ahead of the summer driving season. Higher oil prices hurt corporate profits, and ultimately companies' stock prices, because they essentially act like a tax, raising firms' costs.

Another worry is the lack of job creation, which is seen as critical if the current economic recovery is to maintain its momentum. Most analysts agree the stock market is unlikely to make much headway until the March jobs report, due on April 2, is released.

Despite three straight months of disappointment on the jobs front, Steve Stanley thinks the March report will show decent growth.

“I’m still a frustrated optimist,” Stanley said. “March will not be blockbuster month, but I think the employment picture will improve in the spring, so we’ll see an improvement,” he said, noting that there is a lot of circumstantial evidence pointing to better job growth, including last week’s jobs survey from employment services firm Manpower, which shows U.S. firms expect hiring from April to June to reach a three-year high.

Wall Street is also waiting on tenterhooks for companies to deliver profit forecasts for the first quarter of 2004, when earnings in the Standard & Poor’s 500-stock index are expected to grow by 15.9 percent according to earnings research firm Thomson First Call.

“Earnings have been great for a few quarters now, but the issue is whether they can remain great,” Stanley said, adding that the worry for Wall Street is that as year-over-year profit growth becomes more difficult in coming quarters, the strength of earnings may fade and become less of a catalyst for stocks.

However, Sandy Lincoln, chief executive of fund firm Wayne Hummer Investments LLC in Chicago, thinks first-quarter profits could be surprisingly strong, possibly renewing investors' hunger for stocks.

"I think investors are going to be phenomenally surprised on the upside," said Lincoln, predicting hefty profit hikes as companies make the most of cost savings and productivity gains. "A lot of companies have really carved to the bone on expenses — it should provide explosive earnings growth."

On the economic front this week, traders will be watching out for reports on February durable goods orders, due Wednesday, the government’s final fourth-quarter GDP figures, due Thursday, and Friday’s University of Michigan consumer sentiment survey for March.

Wednesday’s durable good report is likely to garner the most attention on trading desks, Stanley said. “Durable goods were down in January, but we’re looking for a rebound in February, and most economic data we’ve seen points in that direction,” he said.

Wall Street saw its second straight down week for all three of its major stock indices last week. By Friday's close, the Dow Jones industrials were off 0.5 percent, the S&P 500 index had lost 0.97 percent and the Nasdaq Composite index was down 2.2 percent.

Reuters contributed to this story

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