MarketView for November 5

Summary

The major equity indexes chalked up small gains on Monday in light trading in one of the year's quietest sessions on the day before the presidential election. Whatever the outcome of the race between incumbent President Barack Obama and Republican challenger Mitt Romney, the election's resolution will finally end the uncertainty that has kept the market stagnant for the past few weeks.

The Nasdaq was the strongest of the three major equity indexes, helped by a rally in Apple, the most valuable publicly traded U.S. company. Apple's stock rose 1.4 percent to close at $584.62. The stock has fallen 17 percent from its closing high of $705.07 on September 21.

Once the election is over, the market will turn to the "fiscal cliff," the $600 billion worth of tax hikes and spending cuts that could hit the economy hard in 2013 unless Congress comes to an agreement that will soften the blow.

A budget crisis in the United States could hamper growth around the world. On Sunday, economic leaders pressed the United States to avert the fiscal cliff in the interest of avoiding a large-scale economic slowdown.

Another drag on trading volume was the residual impact of Hurricane Sandy, which has left about 30,000 to 40,000 Americans homeless. The super storm wreaked havoc on infrastructure and housing in the Northeast.

The CBOE Volatility Index, Wall Street's favorite barometer of investor anxiety, rose 4.72 percent - a relatively big move compared with the S&P 500 - to end Monday's session at 18.42.

An index of housing-related shares gained 1.8 percent, while in the energy sector the S&P energy index gained 0.7 percent following a gain in crude oil futures prices and third-quarter earnings from two major energy companies.

Transocean, which operates the world's largest offshore oil drilling fleet, gained 5.6 percent to $48.64, a day after the company reported a higher-than-expected adjusted profit for the third quarter.

Shares of Southern Co., the second-largest domestic power company, fell 2.5 percent to $44.62 after Southern posted third-quarter earnings.

The S&P utilities index was down 1.66 percent, was the worst performing of the 10 major S&P 500 sectors a week after super storm Sandy hit New York City and surrounding areas.

Shares of Time Warner Cable (TWC.N), the second-largest U.S. cable operator, lost 6.4 percent to $91.93 after the company reported a quarterly profit that missed estimates as it lost more video subscribers than expected.

BioMarin Pharmaceutical rose 31.2 percent to end the day at $49.07 after the company said a late-stage trial of its experimental drug for a rare genetic disorder could improve patients' walking ability when the medicine is administered weekly.

Just 5.16 billion shares changed hands on the three major equity exchanges on Monday, a number that was well below this year's average daily volume of 6.5 billion.

Fed Program Is Working Albeit Unconventional

The U.S. Federal Reserve's unconventional monetary policies have lowered borrowing costs and boosted growth without creating unwanted inflation, John Williams, president of the San Francisco Federal Reserve Bank, said on Monday, predicting the Fed's latest round of asset-buying will exceed $600 billion.

The Fed will want to see sustained jobs gains and a consistent drop in the unemployment rate before it stops buying assets, making it likely the purchases will continue until "well into next year," Williams told reporters after a lecture at the University of California, Irvine. The U.S. central bank's prior round of quantitative easing totaled $600 billion; its first one was about $1.7 trillion.

The Fed began its third round of quantitative easing, known as QE3, in September, beginning with $40 billion a month in mortgage-backed securities and promising to continue or expand the purchases if the labor market does not improve substantially.

Although asset-buying and other non-traditional monetary policies pose potential risks, "the available evidence suggests they have been effective in stimulating growth without creating an undesirable rise in inflation," Williams said,  "We are not seeing signs of rising inflation on the horizon." The policies also have not stimulated excessive risk-taking, he said.

The Fed lowered short-term interest rates to zero in December 2008, and has bought more than $2 trillion in long-term securities to lower borrowing costs even more.

August 2011 it moved further into unconventional territory by saying it planned to keep rates ultra-low for about two more years, a form of policy easing known as forward guidance.

In September, the Fed launched a third round of asset purchases and promised to keep rates low until at least mid-2015.

The latest asset purchase program kicked off with an initial $40 billion a month in mortgage-backed securities and the Fed said it will continue or expand the program until the jobs situation improves substantially.

Unemployment was 7.9 percent last month, considerably higher than the 5 percent to 6 percent that most economists see as the norm for the U.S. economy. Inflation has averaged below the Fed's 2 percent target over the past year.

Williams told the largely student audience that the Fed's first two rounds of asset-buying likely shaved 1.5 percentage points from the unemployment rate. They also probably kept the U.S. economy from falling into deflation, he said.

Forward guidance has also become a key monetary policy tool, he said. The Fed's first stab at it, in August 2011 when it promised low rates until mid-2013, pushed down borrowing costs sharply, equivalent to cutting short-term interest rates by 3/4 to 1 percentage point, he said.

Such guidance only works if the public believes the central bank will do what it says, he added.

"If the public doesn't understand the central bank's intended policy path, then forward guidance may not work so well," he said.

One way for the central bank to reinforce public expectations is to buy assets on a large scale, effectively "putting its money where its mouth is," he said. Buying assets shows the Fed is "determined to ease monetary conditions," he said - and helps push down rates further.

Quantifying the effects of the Fed's policies is difficult, he added, but "the presence of uncertainty does not mean that we shouldn't be using these tools."

Williams has been a strong supporter of the U.S. central bank's super-easy monetary policy and is a voter this year on the Fed's policy-setting committee.

Once it comes time to exit its super-easy monetary policy, the Fed will target a "soft landing," raising rates and then selling the assets it has accumulated in its bid to push borrowing costs lower, Williams said.