Week ahead: Fed fuels stock market rally

With the government shutdown and debt ceiling debate postponed until after the New Year, the Fed is once again in control of investors’ fate. The central bankers will convene the penultimate policy meeting of the year this week and there is almost a zero probability that the Fed will change either its short term interest policy, which has kept overnight lending rates at 0 to 0.25 percent for nearly five years; or its $85 billion worth of monthly bond purchases, which is intended to keep longer term lending rates low. In just five weeks, investor sentiment shifted from “The Fed will almost certainly taper bond purchases at the September meeting” to “There’s no way that the Fed will change a thing until the March 2014 meeting.” The change of heart resulted from a combination of weaker than expected jobs data, leading up to the Congressional standoff and the government shutdown itself, which likely shaved 0.5 percent from Q4 economic growth. Short of a major growth spurt by the end of the year, it’s hard to see why the Fed would shift policy this year.

The primary issue is that data is likely to be distorted for a couple of months, which makes the Fed’s job pretty tough. And even if there were great year-end progress, Congress may drag us down the fiscal rabbit hole come January, so why mess with policy until Chairman-in-waiting Yellen takes over the reins at her first meeting as Chairman on March 18-19?  The folks at Capital Economics have warned, “The Fed has missed its window of opportunity. If it's waiting for some degree of fiscal certainty, this really could turn into QEternity.”

The concept of unending Fed support may create anxiety for those who are worried about future inflation and asset bubbles, but the stock bulls are cheering central banker action. It has been almost exactly a year since the Fed announced this current round of bond buying - “Quantitative Easing” or “QE3” was launched in Q4 2012. Since then, the S&P 500 has soared 25 percent. The rally shows few signs of abating, despite the lackluster recovery, valuations being stretched and revenue growth slowing to a creep, because as every trader knows, one should not fight the Fed.

That said, markets have a funny way of turning when investors least expect it. As Edwin Lefevre reminds us in the 1923 trading classic Reminiscences of a Stock Operator, “There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”

MARKETS:

• DJIA: 15,570 up 1.1% on week, up 18.8% on year
• S&P 500: 1759, up 0.9% on week, up 23.4% on year (new all-time closing high)
• NASDAQ: 3943, up 0.7% on week, up 30.6% on year (13-year high)
• 10-Year Treasury yield: 2.50% (from 2.59% a week ago)
• Dec Crude Oil: $97.85, down 3.2% on week
• Dec Gold: $1352.50 up 2.9% on week
• AAA Nat'l average price for gallon of regular Gas: $3.30

THE WEEK AHEAD: Reports in BOLD are rescheduled releases of reports that were on hold until the government reopened. Although the October jobs report will be delayed by a week, the ADP private sector employment report is expected to show a drop off in hiring due to a reduction from government contractors.

Mon 10/28:

Merck, Apple

9:15 Industrial Production

10:00 Pending Home Sales

10:30 Dallas Fed Survey

Tues 10/29:

BP, Pfizer, LinkedIn, Yelp

FOMC Meeting begins

8:30 September PPI

8:30 Retail Sales

9:00 Case Schiller Home Price Index

10:00 Consumer Confidence

Weds 10/30:

GM, Facebook, Starbucks, Visa, Kraft

8:15 ADP Private Jobs

8:30 CPI (SS COLA announced)

2:00 FOMC Announcement (No press conference)

Thurs 10/31:

Conocco Phillips, ExxonMobil, Mastercard, AIG

7:30 Challenger Job Cuts

8:30 Jobless claims

9:45 Chicago PMI

Fri 11/1:

Chevron

Motor Vehicle Sales

10:00 ISM Manufacturing

10:00 Construction Spending