Next up for markets: The presidential debate and probably more volatility

Donald Trump

Jonathan Ernst | Reuters
Donald Trump

Now that the Fed’s meeting is over, market focus could swing pretty quickly to Monday night’s presidential debate between Republican Donald Trump and Democrat Hillary Clinton.

Traders will be watching for follow-through Thursday after stocks surged Wednesday. The Dow scored a triple-digit gain and the Nasdaq hit a record high after the Fed held rates steady. In its statement, the Fed noted risks are more balanced, and played up the strength in the economy. Economists say the Fed now looks on track to raise rates in December for the second time in 10 years.

Ethan Harris, co-head global economic research at Bank of America Merrill Lynch, said the Fed laid the groundwork for a December rate hike, but the election now looms large and it could even become a factor for the Fed.

“The elephant in the room they can’t discuss is [the election], and if the elephant could stop the Fed, for no political reasons, but because the election increases volatility in the market and hurts business confidence,” said Harris. “One of the reasons to wait is to find out do we get uncertainty in the market about future economic policy and does that create a correction in the equity market and slow down business engagement?”

Harris pointed to the fact that the latest NFIB small business survey showed a spike in concern about political uncertainty.

Market pros have been watching for a possible market impact from the election and say there’s a chance it could even show up in the next couple of days, around the debate.

Scott Minerd, global chief investment officer at Guggeheim Partners, said he has been expecting more volatility in the stock market anyway and would not be surprised to see a pullback into October. “I wouldn’t be getting excited about stocks right now,” he said. “It could be a sideways chop.”

But he said the markets could fall prey to the usual weakness at this time of year, and there could be a sell-off that tests the 2,120 area on the S&P 500. The S&P closed at 2,163 Thursday, a gain of 23 points.

He said the election could create more volatility, particularly if it appears Trump leads in the first debate Monday.

“I think that would not be good for markets, mostly because of the uncertainty it creates,” he said. “If [Clinton] were to lose the first debate, that could be the catalyst.” He said Trump’s policies are more wide ranging and less known by the markets.

Ron Sanchez, CIO of Fiduciary Trust, agreed the market could now act volatile. “I think you’re in a range bound and choppy market, as you get closer to the election and earnings season,” he said.

But Scott Redler, partner with T3Live.com, said he thinks stocks have been proving themselves technically. He said when Trump has shown signs of progress, biotech leads, which is also good for the technology sector. Clinton has been viewed as a negative for biotech, and the sector has sold off at times when she has challenged high drug prices.

“I think at this point the market is a bit more comfortable with a close race. You would think people would put more risk on after hearing what the Fed and [Bank of Japan] have to say. If tomorrow we open lower and it was a trap, that would be frustrating for most traders,” said Redler.

On the calendar for Thursday, existing home sales are expected at 10 a.m. EDT and weekly jobless claims are at 8:30 a.m. EDT.

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