The Week Ahead in the Stock Market November 05, 2012

Stock Market: Uncertainty In The Week Ahead!

by Ian Harvey


November 03, 2012

Regardless of the results of Tuesday's U.S. presidential election, the next four years will be a tough act to follow from Wall Street's vantage point.

Markets hate uncertainty, and the uncertainty about who will lead the country, and how, ends with Tuesday’s election.

The election could be a turning point for markets and the economy. The tight race between President Barack Obama and Republican rival Mitt Romney has made for a high level of anxiety, and on Friday, traders quickly shrugged off a better-than-expected October jobs report and shifted focus to the election.

The Past Week
Stocks finished down 1 percent Friday, wiping out the previous session's gains, despite a better-than-expected government jobs report and amid nervousness ahead of next week's presidential election.

The Dow and Nasdaq finished in the red for the week, while the S&P 500 squeezed out a small gain.

The Markets Ending November 02, 2012




For the week, the Dow erased 0.11 percent, the S&P 500 eked out a gain of 0.16 percent, and the Nasdaq dipped 0.19 percent. Pfizer (PFE) was the worst weekly performer on the Dow, while BofA surged.

Among key S&P sectors, energy was the biggest laggard for the week, while consumer discretionary gained.

The CBOE Market Volatility Index (VIX – 17.06) ), widely considered the best gauge of fear in the stock market, sprung back to life in Friday's trading, gaining more than 5.4% on the day but settling close to 1.2% lower for the abbreviated week.

**For a more in-depth look at the past week…..CLICK HERE…..**




The Week Ahead

Earnings from retailers, like Macy’s and JC Penney and media companies, like Disney and Time Warner, in the coming week should not have much bearing on trading. Nor will the handful of economic reports, including weekly claims, consumer sentiment and trade data. Investors will also be watching the recovery after Super Storm Sandy, which slammed the east coast.

The benchmark Standard & Poor's 500 Index (SPX) has rallied 66 percent since President Barack Obama took office - one of the most impressive runs ever for stocks under a single president. Admittedly, the timing of his inauguration - just before the market hit a nadir in March 2009 - is part of the reason.

The national polls show a tight race between Obama and his challenger, Republican candidate Mitt Romney, but leaning toward a win by the president.

The market might like the fact of an Obama win since it would mean less uncertainty.

Strategists have said the market's pattern of late also suggests status quo - an Obama win. A "Romney rally" is a 1-in-3 possibility, taken betting site InTrade's odds of an Obama win at about 67 percent right now. Other prognosticators put his chances of re-election even higher.

The most recent Reuters/Ipsos tracking poll shows both candidates garnering 46 percent of the vote - but polling averages show Obama with small but critical leads in swing states Ohio, Virginia and Iowa.

There's a conventional line that says a victory by longtime businessman Romney would be better for the equity market, given his predilection for fewer regulations and lower corporate tax rates. Still, any move in the market, no matter the outcome, is likely to be limited.

It is possible that the market has priced in an Obama victory, but no matter what, any knee-jerk reaction after the election will unwind over the next few days.

The fiscal cliff is also on everyone's mind, but that will really take hold after the election, since the winner could indicate what happens.

Strategists at LPL Financial have been tracking two baskets of stocks to judge whether the market believes Obama or his challenger Romney will emerge with a win. The "Obama" stocks include health care facilities companies, food and staples, utilities, construction companies and homebuilders. The "Romney" stocks include financials, coal stocks, oil and gas drillers, telecom, and specialty retail names.

The Obama index peaked in early October, before the first debate, largely seen as being won by Romney. Yet in terms of "relative strength," the index still modestly favors the president.

Less Uncertainty

Regardless of the winner in Tuesday's election, the market will have one less uncertainty to deal with. It will shift its focus to the roughly $600 billion in mandated spending cuts and tax increases that could kick in next year and send the U.S. economy reeling - if a deal to prevent it is not reached.

The possibility of a new recession - if Congress fails to agree on how to avoid the cliff - has many market participants counting on resolution, with the election as a variable in terms of when any legislation will pass - not if it will happen.

The end result in both an Obama or a Romney presidency would be a deal. But the status quo would probably mean a more protracted solution and market volatility, according to Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management, in Menomonee Falls, Wisconsin.




Economy in the Week Ahead

A handful of economic data reports are due in the week ahead but nearly all of the focus will be on Tuesday’s presidential election pitting incumbent Democrat President Barack Obama against Republican challenger Mitt Romney.

Key economic data reports due in the week ahead include the University of Michigan’s consumer sentiment index out Friday. The index is a survey of 500 households and their attitudes on the economy. Positive consumer sentiment means stronger consumer spending, which accounts for 70% of the economy. The October consumer sentiment index could get a boost from this week’s encouraging labor report, which showed a better-than-expected 171,000 jobs were created last month.

Also due next week on Monday is the Institute for Supply Management’s non-manufacturing index; out Tuesday is Redbook retail sales, a weekly survey of sales at chain stores, discounters, and department stores; a consumer credit report on Wednesday; and a report on import and export prices on Friday.

For more information and a list of key events and earnings in the week ahead………CLICK HERE…..

Conclusion for the Week Ahead

As for the market, it will probably not move ahead until it’s clear how the cliff will be handled. It’s unlikely that the stock market will surge back without the removal of uncertainty. I think it’s more likely that we test the 200-day moving average and move lower rather than higher, unless the election changes things. The 200-day moving average on the S&P 500 is 1379. A Romney win would also be bullish in that it would boost capital spending, which companies have said they are holding back on due to uncertainty about taxes and the fiscal cliff.

Analysts said a Romney win would be a surprise and boost the stock market, as the market has been pricing in an Obama win. In the bond market, there could be a move in either case.

Further Articles Relating to the Week Ahead

1. The Economy and Earnings in the Week Ahead – November 05, 2012

2. The Past Week Stock Market Results – November 05, 2012

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