The mid-term election and the Fed's November meeting should clear away some uncertainties hanging over markets but may also lead to a new period of heightened volatility.
The coming week is likely to go down as the biggest of the year for markets, in terms of potential course setting events. Besides the Tuesday election and Wednesday Fed meeting, the week is capped Friday by the important October jobs report, and there are dozens of major earnings reports in between.
Republicans are widely seen taking control of the House of Representatives, while Democrats are expected to retain control of the Senate. The expectations of gridlock has so far been taken as a positive by investors. The outcome of the Fed meeting has in some ways been much more debated and has created more anxiety for markets, as the promise of a new round of quantitative easing has driven down the dollar, pumping up stocks and commodities prices around the globe. Economists expect the Fed to announce a new program of easing that would include the purchase of about $500 billion in Treasury securities.
There's a good chance we sell off on the news, unless we get bigger than general expectations. Expectations are you are going to see gridlock in Washington, and there are some people who expect something relatively large from the Fed. I think the Fed is working hard to show it's there for the economy but not to put out as much as people are talking about.
The Fed will be trying to figure out just what the market wants and just what the economy needs. I don't think it wants to negatively surprise the market, but also just not do what market wants. I think the next week could give us a lot of volatility.
QE, is not necessarily viewed as a positive by all analysts, and skeptics believe it will be ineffective and difficult to unwind. It's not necessarily going to create jobs and it may create some asset bubbles.
It should be a wild week, and an interesting one as well.