(Bloomberg) — Investors just got over a hectic week, contending with a blitz of earnings from some of America’s biggest companies as well as a pile of uncertain economic and geopolitical news. But what’s coming may be even worse.
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In the span of just seven trading sessions, there will be four major events that could shape the market’s outlook for the rest of the year — and potentially prompt a rapid about-face by confounding expectations.
On Nov. 2, the Federal Reserve will announce its latest interest-rate decision and give hints about its path forward, possibly signaling plans to ease back from the aggressive pace of hikes that’s threatening to drive the economy into a recession.
Two days later, the October jobs report will provide an important look at how much hiring is slowing. Then on Nov. 8, the mid-term elections may usher in a change in which party controls Congress. And finally, on Nov. 10 there’s the consumer price index, a report that’s played a key role in shaping expectations for the Fed’s path since inflation roared back to a four-decade high.
Throw in the ongoing earnings season and Bank of England’s interest-rate decision on Nov. 3, and it’s clear why some on Wall Street are bracing for a renewed jolt of volatility.
Here’s what investors are on the lookout for in each of these events.
FOMC Rate Decision
Wall Street views a fourth straight 75 basis-point interest-rate hike on Nov. 2 as a sure thing. What the Fed signals will happen next is far more significant, with traders increasingly betting that the central bank will start to ease up on its pace in December. The Bank of Canada did just that on Wednesday, providing a potential opening for other central banks to follow suit as recession risks rise.
Traders are bracing for larger-than-usual price changes on Nov. 2 and Nov. 10, judging by options expirations over the course of the next two weeks. To SpotGamma founder Brent Kochuba, the Fed’s rate decision is the most crucial of the upcoming events and sets the stage for how the data releases that follow will affect markets.
“For volatility traders, it’s the Fed first, everything else second,” Kochuba said. “If monetary policy makers come off as accommodative, that will shift volatility expectations in a big way.”
The October jobs report, released Friday, is expected to show that the unemployment rate increased to 3.6% from 3.5%, edging up from a half-century low. Nonfarm payrolls growth is expected to tick down to 190,000 from 263,000 in September, but that would still indicate continued strength in the labor market.
Data on initial jobless claims Thursday indicated the employment market remains tight, while the initial report on third-quarter GDP showed the economy remains on strong footing, both of which suggest it can weather jumbo-sized rate hikes. A stronger-than-expected jobs report for September sent the S&P 500 Index down 2.8% on Oct. 7, its worst jobs-day showing since the summer of 2010. Another upside surprise could dash hopes that the Fed will dial back its rate hikes to half a percentage point in December.
Stock bulls are hoping for one crucial outcome from the US midterm elections: a divided Congress. Why? Because equities tend to benefit from gridlock in Washington since it tends to produce few if any a major policy shifts.
The two most likely outcomes this midterm cycle — either a Democratic president with a Republican House and a Democrat Senate or a Democratic president with a full Republican Congress — have benefited equity investors in the past. In each of the scenarios, the S&P 500 has proceeded to post annual gains ranging between 5% and 14%, according to Comerica Wealth Management, which cited data from Strategas Research Partners.
“Stocks perform best in a divided government,” Victoria Greene, chief investment officer at G Squared Private Wealth, said. “Balance of power and gridlock is something markets like.”
Few economic announcements have mattered more this year than the consumer price index, given that tamping-down inflation is the central priority of the Fed. Barclays Plc strategists, who plotted the S&P 500’s performance against 10 major economic indicators, found that in the past decade stocks have never reacted as negatively to any economic indicator as they are now to the CPI.
“We may have a shot at getting some clarity toward the end of the fourth quarter on whether inflation is slowing and if the Fed will ease up on rate hikes,” Scott Ladner, chief investment officer at Horizon Investments, said in a phone interview. “Then that could provide calmness in the Treasury market and push investors to take on risk in equities once again.”
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