While the nation is as divided as it has ever been, most people agree that a clear political victory for either side next week is preferable to the long period of uncertainty that followed the election four years ago.
For investors, there's money at stake. During the 2000 election week, the
plunged 4% and the
skidded 12%, as Republicans and Democrats squabbled over who was the winner. The next three weeks were just as tough, with lawsuits and political bickering adding further pressure to the major averages.
If a similar scenario were to play out this time round, stocks would undoubtedly take a hit. But with many people expecting the outcome to be unknown on Nov. 3 -- about 60% of the respondents in an
poll don't expect a clear victory the day after the election -- the stock market might not be as severely punished as it was in 2000.
"If we don't know who the winner is, my guess is we'll have a negative reaction. But it won't be as negative as it was in 2000, because that was such a shock," said Dave Briggs, head trader at Federated Investors.
Meanwhile, if a winner is declared, analysts say stocks could stage a decent rally, as one uncertainty is removed. Briggs said the gains could be more pronounced if the incumbent were re-elected, with solid gains in major drug and energy stocks.
Under President Bush, oil stocks have soared, and managed-care stocks such as
have doubled. But Sen. John Kerry has said he intends to overhaul Medicare and reduce prescription drug prices by allowing imports from Canada and "ending artificial barriers to generic drug competition." In addition, he has announced plans to invest in alternative energy sources.
In general, Wall Street is believed to favor Bush, who has cut taxes on stock dividends and capital gains. But there are certainly many investors who are rooting for Kerry. Recent polls show the candidates in a statistical tie.
"Let's face it, no matter who wins, half the country is going to be mad," said Briggs.
Investors will also face a slew of economic reports next week that could influence trading. On Monday, data on personal income and spending will be released, along with construction spending and the Institute for Supply Management's manufacturing index for October.
Economists are expecting the ISM index to fall to 58.3 from 58.5 in the prior month although a very strong manufacturing report from the Chicago area on Friday suggests a better number might be in the works. The Chicago PMI unexpectedly jumped to 68.5 in October from 61.3 in September.
On Wednesday, factory orders and the ISM services index are on tap followed by a preliminary reading on productivity Thursday. But the most important data of the week will come Friday, as the government releases the latest statistics on the job market.
Economists predict that 160,000 nonfarm payrolls were added in October after just 96,000 were added in the prior month. The unemployment rate is expected to hold steady at 5.4%, and average hourly earnings are projected to climb 0.3%.
Job growth has been disappointing in recent months and another soft number on Friday would further reduce the odds of a December rate hike. Investors are fully expecting the
to raise rates by 25 basis points on Nov. 7, and futures markets suggest there is a 30% chance of a fifth hike in December.
The direction of energy prices will also play a significant role in the stock market next week. After reaching a record $55.17 a barrel on Tuesday, oil prices fell sharply amid an increase in inventories and worries about slower growth in China. That decline helped stocks to gain ground.
Meanwhile, about 50
companies are scheduled to report third-quarter earnings in the week ahead, including
So far, 392 S&P 500 companies have reported earnings, and the blended results -- which include those that have reported and those yet to report -- show year-over-year growth of 16.4%. While that's better than analysts had been expecting a few weeks ago, it's still down from the more than 20% growth seen over the prior four quarters. What's more, estimates for the current quarter have come down to 15.1% from 15.5% on Oct. 1, according to Thomson First Call.
That said, some analysts think a lot of bad news has already been priced into stocks. The UBS Index of investor optimism fell to 62 in October from 74 in September and now stands at its lowest level since September 2003. In addition, short interest on the
New York Stock Exchange
has climbed 2% over the past month. "This is not about being bullish as much as a sign that, like everything else in life, selling pressure can get exhausted," said Merrill Lynch economist David Rosenberg.