Lacking any big surprises, the markets may seem to be on cruise control in the coming week, as investors await the U.S. mid-term election and the Fed's November meeting.
Big oil joins the long list of companies reporting earnings, as a third of the S&P 500 report in the week ahead. Exxon Mobil, Ford, Microsoft, Merck, and Procter and Gamble are among those on deck. There is also a heavy calendar of economic reports, dominated by housing numbers but also including the important first look at third quarter GDP on Friday.
"One of the elements is not just a change in Congress... Hopefully you're going to have more bipartisan work," he said. "You've heard his pretty loudly more recently from business executives...They feel that the government has not been helpful to them and if there's a change to a Congress that's more willing to listen to those concerns, they'll be more willing to invest."
Stocks in the past week made slight gains. The Dow was up 69 points, to 11,132, and the S&P was up 6 points, just over a half percent, to finish the week at 1183.
Dollar/yen was nearly unchanged on the week, at 81.36. Gold lost 3.4 percent to $1324.40 per troy ounce.
The course of the dollar could be a factor for markets in the week ahead, as the stock and commodities markets typically have moved higher as the dollar falls. But any turn in the dollar could be a negative for stock prices. G-20 finance ministers were wrapping up a meeting in Korea Saturday. In a draft communique, they showed a cooperative tone on currencies and vowed to refrain from competitive devaluations.
The big events for markets are in the week after next, when voters head to the polls Nov. 2 and the Fed wraps up its meeting Nov. 3. Republicans are widely expected to gain control of the now Democratic House of Representatives, which analysts see as a positive for stocks. The Fed is expected to announce a new round of quantitative easing after its meeting Nov. 3. Some traders see the stock market in a holding pattern until then.
Citigroup chief U.S. equities strategist Tobias Levkovich said he is currently neutral on the stock market, but he thinks it will be helped by a change in Congress and it could rally into next year on that and other issues. He also expects to get more clarity on the Bush tax cuts, which are set to expire at the end of the year.
"One of the elements is not just a change in Congress...Hopefully you're going to have more bipartisan work," he said. "You've heard his pretty loudly more recently from business executives...They feel that the government has not been helpful to them and if there's a change to a Congress that's more willing to listen to those concerns, they'll be more willing to invest."
Analysts also expect the Fed to announce a new program to buy Treasurys. In theory that would add funds to system, which would push lending rates lower and help reflate asset prices. The dollar has weakened signifcantly since the Fed first started discussing easing in late August.
"People think QE2 (quantitative easing) is responsible for the rising stock market. They're thinking the elections are helping, but I think the bigger thing underneath this is the economy reaccelerating from the soft patch," said Wells Capital Management chief investment strategist James Paulsen.
Levkovich said he went neutral on stocks last week when the S&P 500 hit his 2010 target of 1175. He thinks there could be a rough Paulsen, however, thinks it could race even higher before the end of the year.
"We're close enough to 1200 (on the S&P 500) that we might just go challenge it anyway, and the thing I could see that could propel it is if next week the jobless claims number dropped, and you saw that four week number significantly below 450,000, looking like it was breaking downwards. I don't think earnings reports will do it. We already have a pretty good read on what they're doing anyway, and they're not bad," he said.
"My guess is we've still got a good shot at 1300 before the end of the year. There are things I like about where we are today. The last time we were here, pushing 1200, was in April. Back then there was a breakout in optimism, too much so," he said, noting the markets were then surprised by Europe's sovereign debt issues and a batch of weak data. "Today, there is a lot of pessimism and people are talking about QE. That difference in sentiment says we still have a chance to go through the old highs because we're still climbing a wall of worry," he said.
What Else to Watch
The Treasury auctions $99 billion in 2-, 5- and 7-year notes, and $10 billion in TIPS.
"It's going to be a good week for data. We could get some price action but it could be a little bit contained because we're going to be so close to the next Fed meeting," said John Spinello, Treasury strategist at Jefferies.
"I think the market will concede to the supply a little bit," said Spinello. The notes being auctioned are in the durations the Fed will be buying in its QE program, he added.
The big data point economists are watching in the week ahead is the first reading of third quarter GDP on Friday, but housing data will also be a highlight of the coming week.
Third quarter GDP is expected to show growth of 2.5 percent, up slightly from the 1.7 percent in the second quarter.
"I'm expecting 2.2 percent, and sort of topline big picture, that's below trend. That's below the economy's potential which is somewhere between a 2.5 percent to 3 percent," said Mark Zandi, chief economist at Moody's Economy.com. "At that rate of growth, the unemployment rate will continue to slowly edge higher, so it's not good enough. Some of the growth will be related to inventory accumulation, so the growth of final sales is closer to 1.5 percent, which is just not good enough. It highlights why the Federal Reserve is on the verge of doing what it's going to do."
"You're definitely going to have this battle over inflation, and who is going to eat it...whether it's the consumer of the goods or the manufacturers. I think the next six months, that's a story that's going to play out significant for the S&P. That's a battle that's going to be waged."
Housing data includes existing home sales Monday; both S&P Case/Shiller and FHFA home price data are reported Tuesday, and new home sales are issued Wednesday. The Fed and FDIC hold a housing conference Monday, where Fed Chairman Ben Bernanke and FDIC Chair Sheila Bair will both speak.
Another housing-related issue expected to stay in the news is the concern about mortgage foreclosures, which resulted in the freezing of some foreclosures by banks. States are investigating the banks handling of foreclosures. Another issue is that financial institutions may also increasingly be challenged by investors about the quality of the loans they wrote and sold.
In the past week, Bank of America was asked by the New York Fed and two major asset managers to take back $47 billion in bad mortgages. Bank of America stock lost 4.5 percent for the week.
Uncertainty about the issue overhangs the banking sector. The KBW bank index did recover some ground in the past week, rising 1.5 percent. "People don't know how big it is, and the market doesn't like uncertainty. There's issues as to what it could mean to the housing market or to some banks' capital structures," said Levkovich.
Other econonomic data includes consumer confidence, released Monday, and consumer sentiment, reported Friday.
Weekly jobless claims are reported Thursday, and the employment cost index is reported Friday. Durable goods are expected Wednesday, and Chicago purchasing mangers data is released on Friday.
Of the third of the S&P 500 that has already reported, 83 percent have beaten earning estimates, and 64 percent have beaten revenue estimates, according to Thomson Reuters. The expectations are now that earnings for the 500 companies will increase an average 28 percent this quarter, up from a previous 24 percent, according to Thomson Reuters.
Joel Levington, managing director, corporate credit at Brookfield Investment Management, monitored about earnings calls on about 25 companies in the past week and says while earnings were good, there aren't many companies making forecasts. "Generally, across the S&P 500, revenues came in about where expected to modestly better...There hasn't been a lot of color on looking out to 2011, which highlights that companies comfortable yet with the economic backdrop to go out that far," he said.
Levington said he did hear one common trend on a number of calls, and that had to do with rising input costs and pricing. "If you're talking about industrial companies, for Ingersoll-Rand, Caterpillar , Danaher, all the comments are around pricing to offset commodity inflation...whether you're talking about aluminum, copper, gold, anything that will go into electrical equipment or machinery, everybody's talking about raising prices. They're trying to even them out sas their raw materials go up, they want to increase pricing to offset it. We are kind of hitting the peak in operating margins," he said.
If you look at food, and I look at the notes form McDonald's , they flat out said they are going to be raising their prices in 2011. If you look at what happened, to Kellogg's, part of that was pricing,..now you're talking about agricultural commodities, as opposed to metals," he said. Levington also said telephone companies AT&T and Verizon were talking about increasing their average revenue per unit next year.
"You're definitely going to have this battle over inflation, and who is going to eat it...whether it's the consumer of the goods or the manufacturers. I think the next six months, that's a story that's going to play out significant for the S&P. That's a battle that's going to be waged," he said.
Monday's earnings reports include Amgen, Texas Instruments , Plum Creek Timber, Lorillard, NuStar Energy and Masco.
On Tuesday, Arcelor Mittal, DuPont , Ford , UBS , Bristol-Myers Squibb, Biogen-Idec, CIT, Kimberly-Clark, Paccar, McGraw-Hill, TD Ameritrade, Valero, U.S. Steel, Celanese, Ashland, Sherwin-Williams, Johnson Controls, First Energy, and Cummins report ahead of the open. Massey Energy, Aflac, Dreamworks and McKesson report after the bell that day.
Procter and Gamble , Comcast, Conoco Phillips , Northrop Grumman, General Dynamics, Hess, Legg Mason, Borg Warner, Virgin Media, Whirlpool, Southern Co., Sealed Air, Sprint Nextel , Deutsche Bank and Dr. Pepper Snapple issue earnings Wednesday morning. Allstate, Visa , Norfolk Southern, Symantec, Owens Illinois, FMC, Ryland and Flextronics release results after the close Wednesday.
Thursday's reports include Exxon Mobil , 3M , Royal Dutch Shell, Sanofi-Aventis, Barrick Gold, Avon Products, Blackstone, AutoNation, Colgate-Palmolive , Motorola, CME Group, Duke Energy, Dow Chemical, Fortune Brands, Potash, Raytheon, Starwood Hotels, Williams Cos., Waste Management. Microsoft , MetLife and Expedia report after the bell that day, as does Monster Worldwide, BMC Software, Sunoco, Cephalon and Genworth Financial.
Merck , Chevron , Sony, Constellation Energy, Cigna, Estee Lauder, Weyerhaeuser, ITT and Interpublic report Friday.
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