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Will October Spook the Market?

October is the month to fear on Wall Street, but it'll be hard to top the scary volatility of the summer. A hefty economic calendar, the start of corporate earnings season, news from the mired housing market, and the continuing unwinding of the credit crunch will keep market volatility high this coming month. Plus, we'll have to whistle past some historic market gravestones, like the twentieth anniversary of the 1987 stock market crash on Oct. 19.

To top it off, October closes with the Fed's next meeting on Halloween, of all days. Most traders expect the Fed to deliver another 1/4 point rate cut, soothing credit markets, helping stocks and easing some of the pain in housing -- all treat, no tricks.

It helps that the rough and tumble third quarter went out quietly, leaving stocks with gains but investors with plenty of scars. The Dow was up 487 points, or 3.6% for the quarter, and up 537 points in the month of September after a tough August. The Dow is up 11% for the year so far. The S&P 500 rose 23 or 1.6% for the quarter, finishing at 1526, a 7.6% year-to-date gain. The Nasdaq was up 98 points or 3.8% for the third quarter, a year-to-date gain of 12%.

Stocks had their best September since 1997 and their best month since May. A big story in the markets this quarter has been the decline in the U.S. dollar. For the quarter, it has fallen 5.1% against the Euro and 6.7% against the yen. It declined 1.2% against the euro this week, currently standing at a record $1.4259 per euro. The dollar index went into record uncharted territory this week, below its 1967 level.

As the dollar choked, commodities soared. For instance, gold finished the month of September at a 27-1/2 year high of $742.80 per troy ounce. Gold gained 15% or $94.70 for the quarter.

Whither Stocks?
Here's some theorizing. What if all the speculating about a rate cut at the end of the month actually keeps stock prices in abeyance?

We've into a trend where bad news has become good news because it means to some in the herd that the Fed will have to cut rates. Without some truly dreadful earnings bomb shells, the bull might creep through October with its head up on the belief the Fed will refill its trough.

But CNBC's Larry Kudlow thinks investors playing the Fed are making a big mistake. "Investors betting on stocks because they expect the Fed to ease in October and after that..that's the wrong reason to buy stocks. You buy stocks for earnings and the economy, not the Fed," he said.

Kudlow also says he really doesn't want to see another rate cut. "I believe the rise in gold and the drop in the dollar are important market signals to the Fed to stand pat. The 50 basis point shock and awe was great, but the markets are telling the Fed to stand pat," he said.

Econorama
The big story this coming week is Friday's jobs report. Consensus is 110,000 new non farm jobs. "When you have big data at the end of the week, it makes everything else irrelevant," said CNBC's Rick Santelli.

Mark Zandi, chief economist at Moody's Economy.com sees non farm payrolls at 100,000, but he says watch that unemployment rate, currently at 4.6%. "It may go to 4.7% but it could go to 4.8%...The broader message is businesses are cautious," he said.

On Monday, ISM manufacturing data is due. Pending home sales are Tuesday, but the big news that day will be monthly auto sales. On Wednesday, the ISM non manufacturing index is reported as is the ADP employment report. On Thursday, both the Bank of England and European Central Bank have rate announcements. There are also jobless claims t hat day, as well as factory orders and the federal budget.

Friday is jobs day, and consumer credit is also reported.

Fed Chatter
Fed officials continue to travel the speaking circuit. The big event of the week will be Fed Vice Chairman Donald Kohn's speech on the economic outlook at the greater Philadelphia Chamber of Commerce annual meeting Friday at 9:10 a.m. New York time.

Fed Governor Frederic Mishkin speaks Thursday in Germany, and Fed Governor Kevin Warsh speaks Friday at 7 p.m. on financial market developments at an economics conference in New York.

Earnings Central
A few earnings are due including Walgreen and Palm on Monday. Marriott and ConstellationBrands report before the bell Thursday, and Research in Motionreports after the close that day.

Bear Stearns , a rumor stock of the past week, is holding an investors day Thursday. Reports that Warren Buffett and others were looking to buy a stake in Bear drove that stock higher but were knocked by CNBC's Charlie Gasparino and David Faber.

Oil Drip
Crude has had a volatile week, moving sharply lower then higher again. For the week it was up just $0.04 at $81.66 per barrel. Oil has gained 16% in the third quarter and is up 34% year-to-date.

Gasoline slid 9.8% or 22.59 cents for the quarter to $2.0683. It is still up 29% for the year to date. Natural gas, meanwhile, climbed 1.4% for the third quarter to $6.870 per million BTUs, but it was up 26% in the month of September, making up for a summer slump. It's no surprise that energy stocks are the best performers year-to-date.

Of the S&P 500 sectors, energy was the top performer since January with a 27.2% gain. Oil services stocks are up 47%. But we could also be seeing some clean energy technology stocks on the move too if you listen to what Dan Yergin heard in President Bush's Friday speech.

Several notable points were made by Bush and "the most notable being that the clear signal that much more investment in 'clean energy' technologies to deal with global warming is coming and that Bush is going to try to have a carbon program in place before he leaves the White House," said Yergin, CEO of Cambridge Energy and CNBC's global energy analyst.

"The president called for an international clean technology fund, supported by the major industrial countries, to push new technologies in the developing world," said Yergin. Bush pointed out that so far only the U.S. and Japan support major research programs for clean energy.

What Greenspan Really Meant
There's been a lot of speculation about former Fed Chairman Alan Greenspan's recession forecast, and that topic came up again Friday when the BBC reported that Greenspan said there's less than a 50/50 chance of a recession though the risk has increased slightly.

We thought that fit perfectly with what Greenspan told CNBC's Steve Liesman recently. He said the risk of a recession is slightly greater than the one third risk he previously had forecast. So what is it?

Yergin says he knows. He interviewed Greenspan last week at a forum in Washington and he pushed the former Fed chairman to be much more specific. And he was. Apparently, he said he believes there's a 42.35% chance of a recession, less than 50% and greater than a third. We read between the lines though and see Greenspan's sly sense of humor coming through, and Yergin notes he said it with a smile. Take a look at Yergin's article on CNBC.com on the interview, headlined "The 42.35% Chance: A Chat with Greenspan."

Octobers to Remember
We all know that 1987 was the worst October ever for stocks. That year, the Dow was down 23%, the Nasdaq lost 27% and the S&P 500 fell 21%. The best October for the Dow was 1982 when it gained 10.65%. Nasdaq and the S&P did the best in 1974, with gains of 17% and 16% respectively.

FYI: I am off on Monday, but hope to be back on Tuesday. See you then.

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.