The idea occurred to me last night to defer this week's column a day, in view of the massive data dump we're in line for over the next couple of days. Given the amount of data, though, as well as its uncertain timing, it seems better to break things up into pieces.
You can read sermons about the budget-and-debt deal in detail elsewhere. My only advice would be to ignore the type of sweeping pronouncements that usually accompany this kind of thing - it isn't going to produce the recovery boomlet that Wall Street will start predicting almost immediately, nor should one come to any firm conclusions yet about the next leg of the journey.
There are some grounds for hoping that the January-February episode will be less traumatic, in that the GOP is probably going to feel some pressure from business to be more centrist, and the Obama administration, having won its victory, is probably going to be more expected, perhaps even more willing, to throw some budgetary nuggets the Republican way. Three months is a long time in politics, though, so I'm not going to put any bets down on it.
So far as the market is concerned, there are one and a half rally points left this month. Unlike the budget rally that turned the new year, markets didn't sell off this time on the anxiety of default and sequestration. The very news of a possible Senate deal on Tuesday sent stock prices shooting up again, so there is no oversold state of anxiety to rebound from. One should certainly expect prices to be in the green on Thursday, especially if there is no other major economic release, but a five percent move from here - as happened with the last midnight-hour reprieve - is not in the cards, not on the strengths of the debt deal alone.
No, the relief rally is at least half-spent, if not more - futures have actually dipped slightly into the red on the heels of the House passage of the extension bill. I wouldn't be at all surprised to see international markets outdo the U.S. on Thursday and perhaps Friday as well, depending on what data manages to escape in the next day or two. That said, the near-term chances for a run at 1750 on the S&P 500 are still decent.
The remaining scheduled rally point comes at the end of the month, with the Fed's almost certain no-taper stance, one that may be embellished by suggestions of no taper for the remainder of the year. Furloughed government employees are in line to receive their back pay, a point we'll return to later, but the mist of caution - calling it a "cloud" is perhaps overdoing it - that's been in place this quarter isn't apt to completely dissipate before the January-February timeframe, when we get to unsheathe the long knives again (we can expect the usual gang of pom-pom wavers to declare the mist utterly vanquished, but none of them will be from the business world).
That uncertainty-fueled mini-slump is one good reason for the Fed to leave well enough alone, good at least from its own perspective. Bernanke may also be reluctant to undertake anything that seems to pre-empt his successor (but could start deferring to Yellen too, so be careful of predicting that one).
While the October Fed meeting set for the 30th will have the good fortune of occurring just before the traditional first-day-of-month rally, it will have the less fortunate timing of coming at the end of earnings season, which to the surprise of no one is not shaping to be a gangbusters one. Guidance for the fourth quarter is taking a hit, and the Fed rally may only have the effect of making up for lost ground.
If we do get past 1750 over the next few weeks, perhaps with the aid of the Fed and end-of-month calendar, then I would get prepared for a rough few weeks. This earnings season isn't going to set the markets on fire, and while I realize that the shutdown has had an economic impact and will undoubtedly get blamed for an even bigger one, if the recent forecasts from companies like Ebay (EBAY) and Stanley (SWK) are at all symptomatic, we're going to need some help to stave off a market slump that could start to get traction as earnings season winds down, a fade that could very well run all the way into Thanksgiving.
The missing economic data is for now, a wild card. I have concerns about September and October retail sales, especially with October being generally balmy in much of the northern part of the country. Expect the Street to try and slip past any weakness by talking about the shutdown and hinting at the inevitable big burst of make-up spending, but the latter may take time to show up in hard figures (and is usually less than promised anyway). The Beige Book release didn't indicate any strength for the September jobs report, nor did the ADP payrolls report, but the Labor Department report is notorious for its surprises. I'm not making any predictions.
I will say this about the jobs report, though - it's now set up to have a bigger impact than it might have had two weeks ago. If it comes in on target, then I wouldn't expect much beyond the usual half-percent or so automatic rally, but if it comes in with a good miss-plus-downward revision against the current backdrop of earnings disappointments, you could see a serious sell-off start to get underway pretty quickly. A big upside surprise, on the other hand, would be tremendous ammunition for blaming all things weak on the budget drama, and provide a pretext for skating through yet another weak earnings season unscathed.
The dismissal of the weak New York Fed manufacturing survey - 1.52 in lieu of the consensus 7.0, and down from 6.29 - is emblematic over what to expect for much of the upcoming economic data (though the longer-term trend on the chart is not encouraging). The Philadelphia Fed survey being released Thursday morning has already been written off, and September industrial production may suffer the same fate. It's worth keeping in mind that unless the data is truly awful, low expectations could mean that it's only able to surprise to the upside for a couple of weeks. The jobs report is in a different category.
In sum, while there is room for new highs this month, the ceiling looks limited. The chances for 1750 in the very near future are pretty fair, but the chances for 1650 by Thanksgiving are just as good. Expect some volatility, though there isn't yet much of a case for either a blow-off top or a major correction, not without a significant externality or massive economic surprise. My next article should include jobs and retail sales data, along with a harder case for third and fourth quarter GDP, and from those the chances for a November fade.