Add a rocky earnings season to witches' brew of a market
Third-quarter earnings season may deliver a few bumps of its own to a market that is having a hard time looking past the political drama in Washington.
Earnings season officially starts in the coming week with the report of the first Dow component, JPMorgan, on Friday. Former Dow component Alcoa reports earnings Tuesday, but it passed the baton of having its report mark the start of quarterly reporting season when it got removed from the Dow last month.
The Fed will be a major focus in the week ahead, with more than half a dozen Fed officials speaking, and the minutes from the last Fed meeting are released on Wednesday. Traders are hoping for insight into the decision to maintain its $85 billion monthly bond purchases and clues as to when it might start tapering its buying.
But the markets will mostly be hostage to the dickering in Washington and whether there's any sign of movement in negotiations to restore funding to the government and address the debt ceiling.
The Treasury is also selling $64 billion of 3- and 10-year notes and 30-year bonds in auctions Tuesday through Thursday.
"I think the auctions should probably go well," said Tom Simons, Jefferies money market economist. "I don't think there's going to be any resolution to the government shutdown or debt ceiling over the weekend. We'll probably be in a similar scenario next week as we are in now—waiting and watching—but the difference is we'll be closer to the Oct. 17 date."
Treasury Secretary Jack Lew has said Oct. 17 is the date on which the U.S. would hit the debt ceiling. The Obama administration has pushed to raise the ceiling, but Republicans are opposed.
"As we get closer to the end of the week, we could be in 'risk off' mode, which should support the 3-year auction but the longer-dated auctions should also do well," he said.
Stocks floundered in the past week, but on Friday they rose as traders hoped for a weekend surprise from Washington. The Dow was up 76.10 points at 15,072.58, but down 1.22 percent for the week. The S&P 500 rose 11.85 points to finish at 1,690.51 Friday but was off 0.07 percent for the week. The Nasdaq was the only winner of the three major stock indexes, up 0.69 percent for the week at 3,807.75.
"The market's up a bit, a lot of hope, but I learned a long time ago, hope is not a strategy," said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management. "We're hearing a lot of people saying resolution is on the way, so that's a reason for the market to be up (Friday), but the low volume shows there's a lot of cynicism and skepticism about the whole budget process."
(Read more: A tweet underscores why Washington is stuck)
The market's focus has shifted dramatically from a nearly myopic obsession with the Fed and its quantitative easing program to every headline coming from Washington on the budget and debt ceiling.
Many traders were surprised by the fact Congress allowed the government to be shut down, and they now fear the pain a long shutdown could bring the economy. They also expect a reflex rally once the situation is resolved.
The debt ceiling crisis could turn into a nail-biter, with Congress and the White House going down to the wire before fixing it, but traders mostly see it getting resolved. Against that backdrop, there is a lack of government economic data for markets that are hoping to handicap what the Fed will do. The Fed has said it will make its decision on paring back the bond-buying program based on the data. Fiscal uncertainty was on the list of reasons it did not announce a taper in September.
"The lack of the unemployment report, which so many of us are used to robotically analyzing, adds to the uncertainty," Grohowski said. The monthly jobs report was scheduled for release Friday, but it was delayed by the shutdown. Only the weekly jobless claims report is being released by the government, and it will be reported Thursday morning as usual. The Fed is self-funded so its operations and releases are not affected by the government shutdown.
Grohowski said the stock market could trade lower while the situation in Washington remains uncertain. "I think it's kind of a slowly deteriorating market due to disappointment. I don't think we come into a down-5-percent day, but I could see 3 to 5 percent on the downside as the clock ticks towards Oct. 17," he said. Grohowski expects the market to do better after there's a resolution, but he does not expect it to go much higher this year.
"Over the past five years, if you did overreact to short-term political developments, overall that cost you money," he said, adding he expects some investors to take profits after the market's nearly 19 percent year-to-date increase. "If this does get resolved, we recoup the losses, but I don't' think we make a lot above that," he said.
One reason analysts expect October to be choppy is because earnings growth this quarter is expected to be a fairly sluggish 3.5 percent.
"1,700 to 1,750 (on the S&P) has been and continues to be our target at the end of the year. Even with this pullback, it still doesn't give us a lot of room on the upside. It's concern over third- and fourth-quarter earnings," Grohowski said. "I worry a little about fourth-quarter earnings if the shutdown goes on."
Economists expect that even one week of a shutdown would slow the economy's growth, and some forecast a two week-shutdown could shave about a half percent off of GDP growth.
What to Watch
**Scheduled data but unavailable when government is shut down
3:00 p.m.: Consumer credit
Earnings: Alcoa, Yum Brands
7:30 a.m.: NFIB survey
8:30 a.m.: International trade **
10:00 a.m.: JOLTs job opening data **
12:25 p.m.: Cleveland Fed President Sandra Pianalto
12:30 p.m.: Philadelphia Fed President Charles Plosser on economy
1:00 p.m.: $30 billion 3-year note auction
Earnings: Costco, Family Dollar, Progressive, Fastenal, Ruby Tuesday, Chevron (interim)
10:00 a.m.: Wholesale inventories **
10:00 a.m.: Chicago Fed President Charles Evans
1:00 p.m.: $21 billion 10-year note auction
2:00 p.m.: FOMC minutes
8:30 a.m.: Import prices **
8:30 a.m.: Weekly jobless claims
9:45 a.m.: St. Louis Fed President James Bullard
12:20 p.m.: European Central Bank President Mario Draghi at Economic Club of NY
1:00 p.m.: $13 billion 30 -year bond auction
1:45 p.m.: Fed Gov Daniel Tarullo on regulatory reform
2:00 p.m.: Federal budget**
2:30 p.m.: San Francisco Fed President John Williams
Earnings: JPMorgan, Wells Fargo, Infosys
8:30 a.m.: Retail sales **
8:30 a.m.: PPI **
9:55 a.m.: Consumer sentiment
10:00 a.m.: Business inventories **
11:00 a.m.: Fed Gov Jerome Powell at the IMF annual meeting, Washington
12:30 p.m.: Boston Fed President Eric Rosengren on the economy
—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.