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Politics to Dominate Market as Economy Takes Backseat

Politics are likely to remain in the spotlight for investors next week, as markets become more focused on the presidential election than economic figures.

Simon Smith | Vetta | Getty Images

Against the backdrop of the Federal Reserve’s open-ended quantitative easing program launched a few weeks ago, some traders are discounting much of the economic fundamentals. They believe much of the upcoming data won't yet capture the liquidity the Fed just began to pump into markets.

“It doesn’t matter what the numbers are because the Fed has tipped their hand,” said Tommy Molly, chief dealer at FX Solutions. “The rest of the real economy doesn’t matter much anymore. At the end of the day housing can go through the roof: if the unemployment remains elevated the Fed will continue easing.”

Meanwhile, the presidential elections are having an increased impact on markets. The outcome is seen as key to resolving the fiscal cliff that hangs over the investment climate.

Any revelations from economic data will come mid-week, when the Fed’s Beige Book—the central bank’s closely monitored view of economic conditions—is released on Wednesday. Also of interest will be initial jobless claims, mortgage figures and consumer confidence later in the week.

In this environment, traders expect gold to continue a run that saw the precious metal stall out near the psychologically-important $1,800 barrier. Over in Europe, the 'will they or won't they' debate about Spain taking a bailout should whipsaw the euro .

The calendar could prompt investors to book profits, particularly with the impressive run-up in the Dow , Nasdaq and the S&P 500 — all of which sit near multi-year highs in the wake of Friday’s encouraging payrolls data.

Expectations for the economy are fairly low, yet analysts still think corporate earnings will be supportive of more stock gains.

“The baseline forecast [for the economy] is more of the same, but in an environment in which earnings are still pretty good and interest rates are still very low, the baseline economic forecast does support higher equity prices from here,” said Jan Hatzius, chief economist of Goldman Sachs, told CNBC on Friday.

The first test of that theory will come on Tuesday, when the third quarter earnings season kicks off in earnest. A clutch of companies, which include bellwether industry giants like Alcoa, Costco, andJ.P. Morgan, will report on their earnings, which are likely set the tone for the coming quarter.

As investors continue to price in good news and more Fed easing, some are questioning how much higher equities can go. The market’s reigning uber-pessimist, Marc Faber, told CNBC.com’s “Futures Now” earlier this week that he is bracing for a market correction.

"Unfortunately I have a lot of dollars," Faber said in an interview. "I just want to have a lot of cash because I think that within the next six to nine months we can buy just about anything 20 percent lower than it is now."

Because the global economy continues to confront a host of challenges – from a slowing China to a crisis hit Europe and a still sluggish U.S. economy – a number of investors believe the stock market is flying on a set of gossamer wings.

On Friday, markets got a fleeting boost from news that the Labor Department reported that the economy added 114,00 jobs last month – above the psychological threshold of 100,000 jobs yet still not sufficient to absorb an influx of new workers and current job seekers. In a surprise, the unemployment rate dropped to 7.8 percent, the lowest since January 2009. (Read more: What the Jobs Report Really Says About the Economy.)

Yet in an election year, most data is being sifted through a filter of politics.

Even in a booming economy, payrolls figures have both major political and economic implications. Yet even still, Friday’s jobs data managed to unleash an unusually fierce torrent of controversy and conspiracy theory.

Some Republicans openly accused the Obama administration of manipulating jobs data to achieve favorable results ahead of Election Day, which triggered pushback from Labor Secretary Hilda Solis. She declared herself “insulted” by the implication. (Read more: New Employment Report More Politics Than Economics?)

With only one more jobs report left to go before voters go to the polls in November, the political debate about the economy is expected to get more acrimonious. The outcome of the presidential election is of particular importance as the so-called “fiscal cliff” draws nearer.

The resulting spending cuts and potential tax hikes is unnerving many companies, who have said they will delay hiring and investment decisions until a resolution has passed. With both Democrats and Republicans fixated on Election Day, many chief executives aren’t holding out much hope that the polarized climate will lift.

“Unfortunately we’re not seeing the level of civility or respect that we need,” said Howard Schultz, CEO of coffee giant Starbucks, in an interview to CNBC. He avoided taking sides between President Barack Obama and his Republican challenger, Mitt Romney, but said the economy faced massive challenges. (Read more: We Can’t Wait For DC to Fix Economy: Starbucks CEO.)

“We’re facing the fiscal cliff, the debt ceiling debacle that we saw a year ago is still hanging over the country," Schultz said. "We have serious problem.”

What to Watch

Monday

No data

Tuesday

0730 am September Small Business Survey

0100 pm Three- year note auction

Earnings: Alcoa, Chevron, Yum!

0830 pm Fed Vice Chair Janet Yellen on sovereign risk at IMF annual meting, Tokyo

Wednesday

1000 am August wholesale inventories

1000 am JOLTS

0100 pm Ten-year note auction

0200 pm Beige Book

Earnings: Costco, Host Hotel & Resorts, Progressive, Ruby Tuesday

Thursday

0830 am Initial claims

0830 am International trade

0830 am Import prices

0100 pm 30 Year bond auction

0200 Federal Budget

Earnings: Safeway, Winnebago, Fastenal

0330 am Fed Vice Chair Yellen on Japan and the global economy, Tokyo

1130 am Fed Governor Sarah Bloom on growth inequality in Deauville, France

1230 pm Philly Fed Governor Charles Plosser on the economic outlook in Hartefeld, PA

Friday

0830 am Producer Price Index

0955 am U-Michigan Preliminary Consumer Sentiment Index

Earnings: JP Morgan, Wells Fargo, Infosys, Webster Financial

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

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  • 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.