ELECTIONS ‘94: IMPACT ON BUSINESS : Power Change Is Cheered on Wall St.; Stocks, Bonds Stable : Markets: Early rally in the Dow fades, but analysts see long-term investment benefits from shift to conservatism.

Wall Streeters on Wednesday mostly embraced the Republican sweep of Congress, although with the usual caveat that any significant payoff for the economy and markets will be long-term in nature.

And offsetting some investors’ optimism about continued low inflation and greater deregulation under Republican rule was the fear of a newly soaring federal budget deficit if tax-cut fever spins out of control.

Overall, however, the dollar and foreign stocks appeared to get a boost from the conservative shift on Capitol Hill, and many U.S. investors said it was easier to identify potential winners than losers in financial markets with the Republicans in control.

Indeed, defense stocks jumped, anticipating higher defense spending. Also rising were health care stocks and cable TV issues, spurred partly by expectations of less federal meddling in those industries.

The U.S. stock market began the day with a bang, with the Dow industrials surging 38 points at the opening bell. By midday, profit taking had the Dow down 20 points from Tuesday’s close, but it struggled back to finish with a 1.01-point gain, at 3,831.75. Losers outnumbered winners by 12 to 10 on the NYSE in heavy trading.

In the bond market, interest rates mostly eased, though they closed above their lows for the day. The benchmark 30-year Treasury bond yield dropped as low as 8.08% but closed at 8.11%, down slightly from Tuesday’s 8.12%.

Although financial market performance historically has shown no pattern based on the party in control of Congress, Wall Streeters say the electorate’s perceived message Tuesday supported what markets generally cheer: an economy less encumbered by regulation and taxes, which can limit enterprise and raise the cost of doing business.

“There is now a reduced likelihood of government interference in business that would otherwise threaten to lift the long-term rate of inflation,” said John Lonski, economist at Moody’s Investors Service in New York.

Marshall Acuff, strategist at Smith Barney, put it this way: “You are not going to get any new regulation out of this Congress.”

The belief that less regulation would mean continued low inflation could be particularly good for the bond market, after a yearlong bear market that has pushed interest rates up sharply, Lonski said.

Though rates have been reacting to the strong economy, he said the Republican win could convince more potential bond buyers that “yields will peak at a lower level in this economic cycle.” In theory, inflation expectations dictate the trend in rates over the long haul.

The great risk is that the GOP’s insistence on tax cuts--possibly including a capital gains tax cut, a key Wall Street wish--could have the opposite effect on the bond market, analysts warned.

If Wall Street begins to fear that Congress will allow the federal budget deficit to swell again by abandoning self-imposed rules that require spending cuts to offset tax cuts, bond yields could rocket.

But many analysts doubt that most Republicans would side with a plan that would mean bigger deficits. In fact, Lehman Bros. analyst Thomas Gallagher in Washington said that “a balanced-budget amendment is likely to come up early in both houses, and that will affect all other decisions they make” on taxes and spending.

Moreover, the Federal Reserve Board, which has been tightening credit to slow the economy, could threaten to lift rates even more significantly if it believes Congress is getting behind a runaway-deficit plan that threatens to spur too-fast economic growth and inflation.

“I think (Fed Chairman Alan) Greenspan would fight Congress tooth and nail” on any increase in the deficit, Acuff said.

One Fed official signaled Wednesday that the Fed actually expects an easier time with a Republican Congress. Fed Governor John LaWare told reporters that “one effect (of the GOP sweep) will be to make it much pleasanter” to go before Congress.

Some Democrats on key committees have harangued Fed officials over their tighter-credit policy. But Rep. Jim Leach (R-Iowa), a Fed defender, is expected to chair the House Banking Committee.

Another side benefit of the Republicans’ takeover, some experts said, could be a stronger dollar. The dollar has tumbled against key currencies this year, and Wall Street has blamed President Clinton’s weak image with foreigners.

If those investors believe the new Congress will provide the promise of long-term economic stability that Clinton allegedly has not, foreign money could pour into U.S. securities, lifting the dollar.

On Wednesday, the dollar rose to 1.529 German marks in New York from 1.510 on Tuesday, and to 97.88 Japanese yen from 97.18.

Despite the euphoria in some quarters, Salomon Bros. strategist David Shulman noted that many Republicans have opposed the global General Agreement on Tariffs and Trade. He said Congress’ failure to pass GATT would be a major blow to markets.

Other analysts said that any new long-term optimism about markets will quickly be tempered by the reality that the Fed’s program of raising rates to slow the economy isn’t finished. The next Fed rate hike is expected Tuesday.

Among Wednesday’s highlights:

* Health issues rising included Pfizer, up 1 3/4 to 76 1/8; Merck, up 1 to 36 3/4; Amgen, up 2 5/8 to 56 5/8, and PacifiCare A, up 2 1/8 to 71.

* Bullishness on defense spending lifted Lockheed 1 1/4 to 73 3/8, Northrop Grumman 1 1/4 to 44 1/2 and Loral 7/8 to 39 1/2.

* Overseas, London’s FTSE 100 stock index surged 35.8 points to 3,099.6, and Frankfurt’s DAX index leaped 43.03 points to 2,096.47. Traders pointed to optimism in the wake of the American elections.