US stocks’ week of reckoning arrives

NEW YORK: The wait is almost over. After a two-month rally in the stock market, some investors are about to see if they get what they wished for: more Republicans in Congress and lots of cheap money.

The US stock market has priced in the Republicans gaining ground in Tuesday’s midterm elections, an outcome widely seen as more business-friendly, as well as the Federal Reserve pumping billions into the economy through Treasury debt purchases. The Fed’s statement on Wednesday afternoon at the end of its two-day policy meeting is widely anticipated for details of the central bank’s economic stimulus plan.
Jobs will be a touchstone, with the high US unemployment rate figuring into the campaign rhetoric of Democrats and Republicans alike in the midterm elections.


The federal government’s non-farm payrolls report, due on Friday, is expected to show a gain of 60,000 jobs in October, compared with September’s loss of 95,000 jobs, according to economists polled by Reuters. The US unemployment rate, however, is seen holding steady at 9.6 percent.
More earnings from S&P 500 companies and a steady stream of top-tier economic indicators will give investors more evidence of the economy’s health throughout the week.
A series of foreign central bank meetings also is on tap.

But these numbers will serve mostly as backdrop to the outcome of the elections and the Fed meeting.
With so many variables in the week ahead, Wall Street professionals are unusually reticent to call the market,
Only one thing seems for sure: Volatility will play a major role.

Traders expect the week to end with a swing of around 2.5 percent in either direction, based on options activity in the SPDR S&P 500 fund. While that is not out of the ordinary, traders could see significant volatility during the week as events unfold.

“It will probably be a very volatile and very active market because there are a lot of moving parts,” said John Praveen, chief investment strategist of Prudential International Investments Advisers LLC in Newark, New Jersey.

If there are fireworks, they will probably come after the Fed’s two-day meeting on Wednesday afternoon. That could create a dead period for markets at the start of the week, especially if the elections’ results are in line with predictions.

Expectations of the size of the Fed’s purchases of US government bonds have been coming down in recent days. That has kept the stock market locked in a tight range, but it has also opened the door for upside surprises.

“Two weeks ago, the Fed was definitely poised to disappoint the market,” said Burt White, managing director and chief investment officer of LPL Financial in Boston.