Stock Market This Week: Five Themes To Watch

It was a rough week for stock, with the benchmark S&P500 closing 3.26% lower. However, the bulls did manage a strong close on Friday, with the index closing 1.36% higher on the day.

Interest rates continue to weigh on the market, with the Federal Reserve raising rates for the sixth consecutive time, with borrowing costs reaching their highest levels since 2008.

We've now seen 80% of S&P 500 companies report their Q3 earnings, which may help keep a lid on volatility for now. Some big names are still reporting this week, including The Walt Disney Company, Palantir, Occidental Petroleum, and The Trade Desk, among others.

The October CPI inflation report on Thursday will be widely watched and could give some insights into future interest rate hikes. 

Here are five key themes to watch this week:

US Midterm Elections:

Midterm elections could have a profound impact on trading this week. Usually, markets are jumpy going into an election cycle, especially with how contentious the elections have been as of late. Still, this cycle holds particular significance because of its implications on energy and inflation. 

With the current administration doubling down on their restrictive energy policy, as the world is being throttled on power, any more announcements could cause the markets to move. It's possible we could see more aggressive rate moves coming post-election, and those will start to be indicated as soon as the votes are tallied. With the non-farm number coming in hot this week in the US markets, it's a sign that the actions to date aren't enough to curb the inflation beast. 

If the republicans gain some ground in the house and senate, the markets could rally hard post counting. Usually, gridlock is positive for the markets as nothing really gets pushed through. No side's agenda can be followed. If the democrats maintain complete control, the markets may view this as a bearish event given the administration's posturing to date.

CPI Number on Thursday 

There is a lot of potential volatility with the US CPI release. It is anticipated to be around 8.0% year over year, and whether it's a beat or a miss will dictate a lot about future rate decisions. If it appears that inflation is coming back into the Fed's desired range, then that may be a positive for all markets. This could signal to the Fed that what they are doing is working, and they may start to back off the rate hikes or at least slow the pace. If the report comes in above estimate, that signals a huge issue to the Fed. That would mean even after all the hikes to date, they still do not have a grasp on the inflation problem. 

Bitcoin

As of last week, Bitcoin and crypto are also on a rally. This usually bodes well for the markets as all assets appear to be linked at this point. But regardless of that, with bitcoin solidly over the $20,000 handle, I would expect to see more upside action. Recently the 19/20K handle seems indicative of buying in the broader market. If this link is breached, though, I would be ready to see some downside movement in the other markets. While there is no doubt that crypto seems to be influencing the markets, I have yet to 100% figure out if it is the equity markets driving crypto or the crypto markets driving equities. Either way, 20K seems to be a crucial psychological number in crypto land. 

Fed Speakers

There will be no shortage of Fed speakers this week. With elections, energy concerns, and the inflation number due Thursday, be prepared for anything while they are speaking. Do not be surprised to see a lot of contradicting information creating indecision in the general markets.

Rotation Rotation Rotation 

The fifth thing to watch this week is not so much a news or external event but something that has been observed over the past few weeks. There appears to be a significant sector rotation in the US markets. Energy and Utilities seem to be seeing quite a bid, while tech and other high beta names are not. Even the mighty giant Apple was red even on green days this past week. While there is no tradable edge in this, it is worth keeping an eye on. 

Sector rotation provides the potential to see where larger players are expecting the best returns in the future, and based off this, the days of high beta could be winding down. This is not to say that a rotation back is not possible, but recently it looks like a flight to safety in the market.

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