Hey, where is the major market decline that some pros said was inevitable if the Democrats were to achieve a big win in the midterm elections?

Prior to last Tuesday’s elections, some observers feared a resounding Democratic victory could batter the market, knocking it down a fast 2% to 3% and perhaps as much as 5% to 10% within a matter of a few weeks.

Views were widespread that the Democrats might retake control of the House, but few thought they could take both the House and the Senate.

With the Democrats having done just that, what now for Wall Street?

A professor of politics at the University of Virginia, Larry Sabato, tells me political risks will be far fewer and less severe than might be imagined. Most of the things the Democrats might want — especially those of a radical nature that would upset the Street, such as a rollback of the president’s tax cuts and a disruption of trade agreements, spurring a new round of protectionism — will not pass through the Senate, he says.

The reason, he explains, is that the Democrats would need 60 seats to shut off a filibuster, but they only have 51. Further, he points out, the Democrats also face the threat of a presidential veto. “It means that any Wall Street worries are for naught,” he says. He does, though, expect lots of investigations (centering on the evidence used to take America to war), but not much legislation on significant matters.

That’s also the thinking of the Prudential Equity Group’s chief eyes and ears in the Capitol, Chuck Gabriel, who expects the election results to produce benign gridlock, which, he notes, is what Wall Street wanted. The Democrats will make a lot of noise, he says, by threatening the drug industry with pricing pressures and oil and gas companies with the imposition of new taxes, but he believes nothing will happen.

Mr. Gabriel does see certain sectors benefiting from the strong Democratic showing, namely housing (such as Fannie Mae and Freddie Mac), alternative fuels (among them ethanol), health care services, generic drug makers, and life insurers.

“The market crash that never was (despite the Democratic gains) is also the market crash that never will be,” Mr. Gabriel predicts. He reasons political worries will not rise to the level where they would interrupt a favorable equities environment as a result of low inflation and the likelihood of a soft economic landing.

Some Street pros, such as Standard & Poor’s chief investment strategist, Sam Stovall, say the reason there was no market crash in response to the Democratic win is that such a development had been pretty much anticipated.

He also notes that history shows good times, not bad times, for the market when the Republicans control the White House and the Democrats control Congress. This has happened in 20 years since World War II. And in those years, the S &P 500 has averaged an annual gain of 7.1%.

What’s more, the third year of such a political regime produces an even bigger increase, an average 17.6% on the six occasions it has occurred. This would imply, but not guarantee, a healthy double-digit market increase next year, Mr. Stovall observes.

Looking ahead, he notes that history also suggests a strong year-end windup. Over the past 18 years, the S&P 500 has posted an average annual November-December gain of 4.48%, with November, the best month of the year, leading the way with an average yearly increase of 2.27%.

Mr. Stovall also expects a strong 2007 showing, with the S&P 500 rising about 8% (or 10% with dividends).His bullish outlook largely assumes the following:

• A slowing, but not retreating economy (no recession). GNP growth is pegged at 2.3% next year, versus estimated 3.4% growth this year.

• Estimated earnings growth of 10% in 2007, versus an expected 14% increase in 2006.

• Moderation in oil prices, pegged at $64 a barrel next year, versus $66 this year.

• A favorable Fed environment, with rate hikes over and headed lower by mid-2007.

His favorite stock groups and three top picks in each category: consumer discretionary, (Abercrombie & Fitch, FTD Group, and Reuters Group), industrial (L-3 Communications, Trinity Industries, and ITT Corp.), and technology (Arris Group, Emulex Corp.,and Ingram Micro). Mr. Stovall views each of the nine stocks as a potential 20%-plus gainer over next 12 months.

He also takes a favorable view of gold, noting healthy economic growth in Asia where consumers view the precious metal as a store of wealth. Likewise, he sees the American dollar falling against foreign currencies. His favorite gold play: Barrick Gold. On the other hand, he is cautious on consumer staples, notably food, beverages, and tobacco, as well as on electric utilities.

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