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Market Insider: Tuesday Look Ahead

Stocks could drift for a second day Tuesday as voters head to the polls to cast their votes for the 44th president of the United States.

"I think this is another piece on the good pile," said Jim Pauslen, chief investment strategist at Wells Capital Management. "Whoever wins, there's going to be a sense that we're turning the page."

Stocks were nearly unchanged Monday after trading in a relatively tight range. The Dow was down 5.18 at 9319.83, and the S&P 500 was down 2.44 at 966.31. Paulsen noted the stock market has not traded with volatility this low since early September. For one day, gone were the triple digit Dow moves of October.

Confidence Building

"There is a great importance to this election. I think a lot of what we've dealt with in the last six weeks has to do with how we sold TARP (the financial bailout)," said Paulsen. He said people became scared as major leaders kept saying how dire the situation had become.

"I do think for that reason this thing could have more impact than it may normally. I don't think Democrat or Republican is that important near term," said Paulsen. He said if Democrat Sen. Barack Obama wins, there may not initially be the typical type of fears about Democratic spending because of the huge cost and extraordinary steps the government is taking to fix financial markets and the banking industry.

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"Does anyone think they're going to do a lot of tax raising now?" he said. "Normally, you'd worry about excessive government spending." He said those issues and concerns could come back in the future, but for now, the focus is on the sick state of the financial markets and economy.

Paulsen said there's a sense that Obama has won, but if Sen. John McCain manages an upset or if the race is very tight, the market could react negatively because of the uncertainty factor.

What if the Democrats sweep Congress, as some pundits say could happen. Some traders say that would be a negative. "That might have some play to it. That could have some negativism to it," Paulsen said. "I just don't see that's the overwhelming driver of this market right now."

Has the Market Bottomed?

Citigroup chief equities strategist Tobias Levkovich, in a note Monday, said it seems possible the stock market has bottomed. "Since 1929, the mean decline for the S&P 500 during bear markets is 36.5 percent. Given that the market already has dropped nearly 46 percent from peak-to-trough, it seems possible that the equity market may have bottomed," he wrote.

Levkovich said investors are wondering who the buyers will be for stocks. Institutions are nervous and there's anecdotal evidence from financial advisors that individual investors are getting out of the market. "While we know that there is a great deal of cash on the sidelines, it is unclear what the specific catalysts will be, igniting the internal fortitude to step up and buy stocks. Yet, within the current context of valuation and confidence measures, history argues more to be positive than we ever could," he said.

Paulsen said he thinks we've probably seen the worst. "I think the downside risk from here is very limited ... Not to say we couldn't go back to test those lows again. We very well could. I just think a 50 percent retrenchment discounts the worst case recession scenario," he said.

Econorama

There's not much on the data front, and the next big event will the jobs data on Friday. On Tuesday, factory orders are released at 10 a.m. Dallas Fed President Richard Fisher speaks on economic challenges at 10:45 p.m.

Monday's markets digested a lot of signals on the economy, most of them bad. For one, car makers released October sales data, showing the biggest decline in more than two decades. The ISM survey showed national factory activity fell to its weakest level since 1982.

"It's telling us there's been a complete collapse in the discretionary areas of the U.S. economy," said MKM Partners chief economist Michael Darda of auto sales. "It's feeding on other business areas as well."

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Also released Monday was the Federal Reserve's quarterly survey showing that banks tightened lending standards dramatically for businesses and consumers, even prime borrowers. Eighty-five percent of banks tightened lending on "commercial and industrial" loans, and 95 percent tightened lending standards for the lines of credit they extend to large and medium sized businesses.

The lack of consumption and the private sector's lack of spending on business equipment "leaves a pretty big hole." Darda said. "The only thing out there working in the other direction is government spending. We got data today showing export demand is collapsing."

"Manufacturing, consumer spending and business spending and now the export side. This has global recession written all over it," said Darda.

He said he is looking for non farm payroll reductions of 200,000 or more, when the October employment report is released Friday. He also expects unemployment to peak at 8.2 percent in the first part of 2010.

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Earnings reports are due Tuesday from ADM, Dean Foods, Magna, Tenet Healthcare, First Energy and Emerson.

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 Senior Commodities Correspondent and 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.