Stocks will be volatile but a little calmer in November after the brutally wild weeks of October.
The presidential election should give the market a bounce in the week ahead, but the focus will quickly shift back to the economy when jobs data is released Friday.
October was the worst month for stocks since 1987. The same volatile month also saw the past week's 10 percent gain, the biggest weekly advance since October 1974.
Traders say the election Tuesday is the key to the week ahead. But they will also be watching to see if credit markets continue to heal. There is also a heavy calendar of economic data, and quarterly earnings from some big names, like Cisco Systems , Walt Disney and Berkshire Hathaway .
"The market generally rallies because the headwind of an election is over and now you have greater certainty," said Dan Clifton, director of policy research at Strategas.
"In the week and day after the 2006 election, the stock market went up fairly significantly," he said.
Clifton said the market has priced in some of a potential Democratic victory, as Sen. Barack Obama leads in the polls, but not entirely. He said to look for moves in sectors that would be affected by Obama's policies. For instance, the sectoral plays like construction and engineering that might benefit in an Obama Administration are currently beaten down. Health care stocks have been used as a defensive play, but they could see some selling pressure if Obama wins.
"We expect a lot more volatility in the health care space in the next couple of days," he said.
The Dow lost 1,525 points in October, or 14 percent, to 9325. In the past week, it gained back 946 points or 11.3 percent. The S&P 500 lost 16.9 percent or 197 points to 968.75 for the month. In the past week, it rose 91.98, or 10.5 percent. The Nasdaq slumped 17.7 percent or 370 points to 1720 for the month. It was up 10.9 percent in the past week.
In October, heavy volatility in the currency market drove the dollar 10 percent higher against the euro. It finished the past week at $1.2744 per euro. It also fell 7.4 percent against the yen for the month, but gained 4.1 percent against that currency in the past week.
The benchmark 10-year Treasury fell 1-4/32 for the month to 100-8/32, raising its yield to 3.968 percent. The two-year was yielding 1.572 percent.
Oil saw its biggest monthly drop in the history of exchange traded crude contracts. Oil was down $32.83, or 32.6 percent for the month, at $67.81 per barrel. It gained 5.7 percent in the past week
The credit markets, the source of much of the stock market's pain, showed signs of life in the past week. Libor, the bank to bank lending rate, continued to decline to more normal levels.
The Fed's involvement in the commercial paper market helped that market show signs of improvement this past week. The selling tide was also stemmed in emerging markets, where the Fed, IMF and local governments pledged or took action.
"Was it a good week? Absolutely," said Kevin Ferry of Cronus Futures Management.
Was October the Bottom?
PNC Wealth Management chief investment strategist Bill Stone said the election will be a positive because it ends a period of uncertainty. He said Friday's jobs data may matter to the market if it's unexpectedly weak.
"Lately, the economic data hasn't seemed to have huge impact. I think maybe if you got a really poor one, you might see some troubles in the market. There's still going to be that eye on the lookout for the worst case scenario — the 'depression watch,'" he said.
Economists expect the loss of 200,000 nonfarm payrolls in October, and a rise in the unemployment rate to 6.3 percent, from 6.1 percent.
Stone recently did a study comparing consumer confidence and the S&P 500's performance. It showed total returns on the S&P were greater following periods of low confidence (less than 100) than following periods of high confidence. He said the same result was true in one, two, three and five-year periods, and the weaker the confidence reading, the better stock market returns.
In the past week, the Conference Board's consumer confidence reached 38, the worst number ever recorded, and ironically the market had one of its best gains in history that day.
Stone said he did the study to show that the market can turn while news is still bad. "Those people who continue to wait for better news to invest are likely to miss the boat," he said. But Stone said that it's possible the market could return to its lows in November.
"We obviously feel better because we've gotten further and further away from that Oct. 10 low, but they've sold into every rally so far. There's no law that says bottoms or lows have to be tested. We won't know for some time," he said.
Stone said he sees lots of values in the market for investors willing to dip in. He is overweight large cap and recommends sticking to high quality names, because it's unclear how long the credit crunch will last. He likes consumer staples, health care and information technology.
"Whether people decide to buy the value or not, I can't tell you. It's sitting out there waiting, and we know there's tons of money on the sideline, so you've got all the ingredients to start the fire. Whether they decide to strike the match and let it go, I don't know," said Stone, when asked whether stocks would end the year higher.
Friday's jobs reports is the big economic headline to watch in the coming week.
Another major read on the economy will be the monthly sales of auto makers, released Monday throughout the day. The results, expected to be the worst in years, are released against a backdrop of efforts by GM and Chrysler to forge a merger.
On Monday, ISM manufacturing data is also released, as is construction spending. Factory orders are reported Tuesday, and ADP's employment report is released Wednesday, as are ISM nonmanufacturing jobs.
On Thursday, weekly jobless claims are reported, as are Q3 productivity and unit labor costs. Chain stores report monthly sales that day, and that could be a good preview of what to expect in the coming holiday shopping season.
The European Central Bank and Bank of England hold rates meetings Thursday. Traders expect rate cuts.
Wholesale trade, consumer credit and pending home sales for September are reported Friday.
Several Fed officials are speaking in the coming week. Dallas Fed President Richard Fisher speaks on economic challenges at the Texas Cattle Feeders Association at 10:45am CT Tuesday. Fed Gov. Kevin Warsh speaks to the Money Marketeers of New York University Thursday evening at 7pm ET on the promise and peril of the new financial architecture. Atlanta Fed President Dennis Lockhart speaks Friday on the economic outlook at 12pm ET in Palm Beach, Fla.
Energy stocks and consumer brands are among the companies reporting in the week ahead.