MarketView forNovember 1

Summary 

More than anything else inactivity, meaning a reluctance to invest, was the name of the game on Wall Street on Monday as the investment world was disinclined to undertake any sort of a plunge ahead of the election and the forthcoming statement on Wednesday from the Fed as to its future direction. Those two events could dictate the stock market's direction for the rest of the year and even beyond.

The benchmark S&P 500 index rose 12.9 percent since the start of September on hopes for Republican gains in Tuesday's elections and a Federal Reserve announcement of monetary easing on Wednesday. With those events imminent, trading volume was light and a 1 percent early rally was erased as much of the Street’s activity turned cautious.

About 7.105 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below the year-to-date daily average of 8.73 billion. The CBOE Volatility index .VIX, the market's favorite anxiety gauge, rose for the sixth straight day, a sign investors were adding to their bets on increased volatility in the near term.

Looking at the day’s economic data, factory activity in October expanded and construction spending rose unexpectedly in September. Other data indicated that manufacturing in China expanded at the fastest pace in six months during the month of October.

Oil service stocks were among the day’s leading issues after Baker Hughes reported third-quarter earnings that exceeded expectations. The shares ended the day up 5.2 percent to close at $48.73. On the Dow Jones industrial average, Caterpillar closed up 0.9 percent at $79.27, while Exxon Mobil ended the day up 0.7 percent to close at $66.95.

M&T Bank was up 4.5 percent on Monday to close at $78.12 after news it would buy Wilmington Trust in a deal worth $351 million. Shares of Wilmington fell 42.5 percent to $4.09 and weighed on regional banks.

If the election ends in the Republican Party taking control of the House, as polls indicate, the Obama administration's ability to enact its agenda would be in jeopardy. At the same time, the word on the Street is that the energy sector could flourish after Republican gains as there will be less chance of increased regulation.

The Fed is expected to announce on Wednesday it will again move into some heavy bond buying to stimulate an anemic economy. It is expected that the size and the scope of asset purchases to be about $100 billion a month, starting with a plan to buy $500 billion in bonds between now and early 2011.

Weighing on the Nasdaq was Amazon.com, down 1.6 percent at $162.62. The stock fell 2.3 percent last week but was up 32 percent from the beginning of September through the end of October.

JPMorgan Chase fell 0.6 percent to $37.42 after ProPublica, an investigative journalism website, said the Securities and Exchange Commission is investigating whether the bank adequately disclosed that a hedge fund helped select assets for a $1.1 billion package of subprime mortgages while also betting against portions of the deal. It sounds like they know someone at Goldman Sachs.

Factory Output Rises

Surprisingly strong growth last month within the manufacturing sector was good news for a sluggish economy but was probably too little, too late to stop the Federal Reserve from putting in place additional monetary easing. The quicker pace of factory growth was also tempered by a separate report indicating that personal income fell in September while consumer spending remained tepid.

The data was among the last before Fed officials gather Tuesday and Wednesday to assess the economy and its uneven recovery from the worst downturn in 80 years. The Fed is expected to inject more money into the economy through bond purchases, and that view was bolstered by the consumer data, which showed no inflation pressure in the economy. The central bank has already purchased about $1.7 trillion worth of Treasury and mortgage-related debt.

All of that overshadowed news that the Institute for Supply Management's index of national factory activity came in at 56.9 in October, up from 54.4, with the employment, new orders and prices paid components of the index also rising.

Wall Street also took solace in the data from Chinese on factory output, while the dollar rose and Treasury prices turned negative. Also released on Monday was data indicating that construction spending rose unexpectedly in September, driven by a one-year high in investment in public projects.

Beyond manufacturing, though, the economy still looks less than robust. The Commerce Department reported on Monday that consumer spending rose 0.2 percent in September after advancing 0.5 percent in August. It was held back by a surprise 0.1 percent decline in income, the first slide since July 2009.

While the data was included in Friday's advance third-quarter gross domestic product report, it underscored the loss in momentum as the quarter ended. What's more, the Fed's preferred measure of consumer inflation -- the personal consumption expenditures price index, excluding food and energy - was flat in September for the first time since April. The index rose 0.1 percent in August.

The economy grew at a sluggish 2 percent annual pace in the third quarter after expanding 1.7 percent in the prior period, driven by a large accumulation in business inventories and acceleration in consumer spending.

Manufacturing Growth Not Limited to the United States

Growth in manufacturing within both India and China rose sharply last month according to data on Monday that suggested the global economic recovery may be on firmer footing. Two surveys indicated broad-based strength in the manufacturing sector, helping to lift natural resource stocks and commodity prices as Wall Street anticipated strong demand from the world's second-largest economy.

China's official purchasing managers' index (PMI) rose to a six-month high in October of 54.7 from 53.8 in September, easily beating market forecasts of 52.9. The strength of China's official PMI was especially striking because the index normally heads down in October, said Yu Song and Helen Qiao, economists at Goldman Sachs.

"The fact that the PMI went up despite this seasonal bias suggests real activity growth was likely to have been exceedingly strong in October," they wrote in a note to clients. The survey indicated that manufacturers continued to run down stocks last month to meet rising domestic orders.

Manufacturing in India -- Asia's other emerging powerhouse -- put in a performance every bit as strong as China's. India's manufacturing was supported by strong domestic consumption. The HSBC Markit PMI for India, Asia's third-largest economy, rose to 57.2 in October from 55.1 in September.

Mirroring a report from Japan last Friday, South Korean manufacturing shrank for the second month in a row as the HSBC/Markit PMI fell to 46.75 in October -- the lowest since February 2009 -- from 48.8 in September.

An unexpected rise in Britain's manufacturing index to 54.9 will increase doubts that the Bank of England will soon embark on more quantitative easing. It followed official data last week that showed the UK economy grew at a surprisingly strong rate of 0.8 percent in the third quarter from the second.

Equivalent surveys from Europe are due on Tuesday, but Britain's PMI showed manufacturing growth picked up pace last month for the first time since March. Flash October figures for Germany, released last month, also gave a strong reading although much of Europe remains mired in debt and poised to cut public spending to deal with it -- a move that will crimp economic growth going forward.