Biggest Week of Year for Markets Could Bring More Volatility

Source: CNBC

The mid-term election and the Fed's November meeting should clear away some uncertainties hanging over markets but may also lead to a new period of heightened volatility.

The coming week is likely to go down as the biggest of the year for markets, in terms of potential course setting events. Besides the Tuesday election and Wednesday Fed meeting, the week is capped Friday by the important October jobs report, and there are dozens of major earnings reports in between. Traders will also be watching for new developments in Friday's security scare, related to a plot to send explosives in cargo, bound from Yemen to the U.S.

Stocks were barely changed in the past week as the markets meandered ahead of the election and the Fed meeting. Republicans are widely seen taking control of the House of Representatives, while Democrats are expected to retain control of the Senate. The expectations of gridlock has so far been taken as a positive by investors.

The outcome of the Fed meeting has in some ways been much more debated and has created more anxiety for markets, as the promise of a new round of quantitative easing has driven down the dollar, pumping up stocks and commodities prices around the globe. Economists expect the Fed to announce a new program of easing that would include the purchase of about $500 billion in Treasury securities.

"There's a good chance we sell off on the news, unless we get bigger than general expectations. Expectations are you are going to see gridlock in Washington, and there are some people who expect something relatively large from the Fed. I think the Fed is working hard to show it's there for the economy but not to put out as much as people are talking about. People have been talking about $500 billion, a trillion," said Stuart Freeman, chief strategist at Wells Fargo Advisers.

"The Fed will be trying to figure out just what the market wants and just what the economy needs. I don't think it wants to negatively surprise the market, but also just not do what market wants," Freeman said. "I think the next week could give us a lot of volatility."

The very idea of QE, while greeted by markets, is not necessarily viewed as a positive by all analysts, and skeptics believe it could be ineffective and difficult to unwind. In theory, the asset purchases are expected to put more money into the system, reflate assets and help drive down lending rates.

"It's not necessarily going to create jobs and it may create some asset bubbles. Generally, it's going to help at the margin," Freeman said.

"The only thing I can count on for next week is it's going to be volatile...short-term players are going to get chopped up, but the longer term players can be patient and wait for the dust to settle," said Marc Chandler, chief foreign exchange strategist at Brown Brothers Harriman. The dollar was barely changed against the euro this past week, but was down 2 percent for the month of October. It lost 3.6 percent against the yen in October.

Chandler said investors hold differing views on Fed easing. One is that the economy is in bad shape, and the Fed needs to help resuscitate it.. "Another is we've got some green shoots sprouting and they want to put a little more fertilizer on it," he said.

"Of course, everybody is talking about the two big things - the election and the QE2 - but I think the economic data is going to be interesting. Probably we'll have the biggest rise in auto sales since the cash for clunkers program last year, and on Friday, we should see the first increase in nonfarm payrolls since May," he said. Auto sales are reported Wednesday.

Whither Stocks

The Dow finished the week 14 points lower at 11,118, and the S&P 500 was flat at 1183. The Nasdaq was up 1.1 percent for the week at 2507, rising with tech stocks.

Freeman said he would not be surprised to see stocks retreat back to the 1100 to 1140 range on the S&P, which was his year end target, before moving higher. "There's always a possibility you could have a 4 to 10 percent pullback. We've had them before. We just had a 13 percent bounce up. If we have a pull back, I would say it's a buying opportunity because we do think we'll have growth next year," he said.

Ed Keon, managing director and portfolio manager at Quantitative Management Associations, said he thinks the stock market is looking past the election and Fed. "At the end of the day, the stock market is about earnings and valuations and what you're paying for those earnings, and the earnings pickup has been terrific, and while stocks are not super cheap, according to historic standards, they are super cheap compared to bonds," he said.

Freeman said Friday's terror scare, as yet unwinding, may be an influence Monday, depending how the story unfolds. "It's difficult to say for Monday. The market's really waiting for some big things that could have an impact on the economy and this is something that is certainly ongoing risk, but as of right now, it's not something that caused a problem for the economy or the market, but it certainly does put a little bit of a dark cloud on the opening," he said Friday evening.

Econorama

Besides Friday's jobs report, it is a fairly busy week for economic reports. Some traders are already speculating the jobs report could have a more optimistic tone than prior reports. Economists expect about 80,000 new private payrolls.

ISM manufacturing data is reported Monday, as is construction spending and personal income. The ADP employment report is reported Wednesday, and weekly jobless claims are reported Thursday. ISM non manufacturing is released Wednesday, as are factory orders. Productivity and costs are Thursday, and pending home sales and consumer credit are released Friday. Retailers release monthly sales Thursday.

Fed Chairman Ben Bernanke speaks to college students in Jacksonville, Fla. Friday, and again to an Atlanta Fed conference in Jekyll Island, Ga. Saturday Nine Fed presidents will attend the meeting, which starts on Friday. Atlanta Fed President Dennis Lockhart and Minneapolis Fed President Narayana Kocherlakota both speak at the conference, and other Fed officials will moderate panels. Former Fed Chairman Alan Greenspan also speaks there Saturday.

Earnings Central

Earnings reports are expected from more than 85 S&P 500 companies, including companies from the media sector, as well as consumer products, health care, energy, insurance and industrials.

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