The confused bull
Mixed economic signals caused investors to step back. Now come new challenges, like the midterm elections.
NEW YORK (CNNMoney.com) -- The stock market hit a speed bump last week as stampeding bulls crossed Wall Street, then crossed back, trying to figure out just where the economy was heading.
They aren't likely to figure it out in the coming week, investors and market analysts say, since few market-moving economic or earnings reports are due. Many eyes will be on the midterm congressional elections, which should provide some distraction.
So where is the market headed next? Not only have recent reports painted a mixed picture of the economy, shaking investor confidence a bit, but after more than three months of gains, stocks seem vulnerable to a bit of a retreat.
"After the strong rally we've had, the market was due for a rest," said Ken Tower, chief market strategist at CyberTrader.
Tower said that worries about a slowing economy, and the end of the earnings reporting period, played into the timing of the selloff that many market watchers had been looking for of late.
While more declines could come next week, in the longer term, stocks have a good shot at resuming the upward trend, Tower said.
That's because a mix of strong earnings and enthusiasm for stocks should provide a floor for the market.
"Companies are buying back a lot of stock right now, while at the same time, individual investors continue to come back into the market," said Jeff Kleintop, chief investment strategist at PNC Wealth Management. "That should create at least a modest updraft for stocks through the end of the year."
But the economy has slowed sharply, and while the Federal Reserve has been talking about the slowdown for months, stock investors haven't really focused on it. Instead, they've been focusing on lower oil prices, solid earnings, and the central bank's decision to hold interest rates steady.
All that helped fuel one of the best third quarters on Wall Street in years, and a surprisingly strong October. The Dow hit record closing highs 13 times last month, while the Nasdaq composite and S&P 500 closed at their best levels in more than 5-1/2 years.
But recent reports have pointed to a slowing economy, including the weakest economic growth in more than three years in the third quarter, as well slowing activity in manufacturing and housing, and no growth in productivity.
Those reports sparked some selling, but also bets that if the economy is slowing so much - and inflation continues to moderate - the Fed can start cutting rates as early as the first quarter of next year.
But all that changed Friday after the surprisingly strong October job report and an upbeat reading on the service sector of the economy. Bond prices tumbled and stocks slumped as investors bet the Fed's not so likely to start cutting rates anytime soon.
All of which has left the bulls at a loss for what to do next.
The week ahead is light on economic releases, with little expected until Thursday, when reports on weekly jobless claims and the September trade balance are due.
In the early part of next week, Wall Streeters will be focused on Tuesday's mid-term congressional elections.
The results probably won't have too much impact on the broader market unless there's a surprise, said Jonathan Golub, U.S. stock strategist at JP Morgan Asset Management.
Most investors expect an end to the Republican-controlled Congress, with Democrats taking the House or both the House and the Senate, he said.
Should that happen, the reaction will probably be muted. Should the markets get a surprise and the Republicans end up holding on to both chambers, the stock market might react more. The impact will more likely be felt by individual sectors. (See gallery for details).
"At the end of the day, it's the earnings and inflation outlook that will determine how stocks will perform through the rest of the year," Golub said.
Earnings results have been notably strong this quarter. Roughly 80 percent of the S&P 500 have reported results and growth is seen at about 18.6 percent versus a year ago, according to Thomson Financial. That's a blended figure, combining reported and expected results.
"If we look at the environment we're in, I think we're underestimating how positive things are," Golub said. "The earnings are good and stocks remain undervalued relative to earnings expectations. Inflation is under control. This is a positive backdrop for the market."