Markets are primed for a dovish statement from the Federal Reserve on Wednesday that should keep a lift in stocks.
The Dow and S&P 500 rallied to record highs Tuesday, as traders bet on an uneventful outcome when the Fed ends its two-day meeting Wednesday afternoon.
"They put the possibility of a surprise tapering at zero," said Art Cashin, director of floor operations at UBS. He said there was some short-covering as traders assumed the Fed would not announce any reduction in its $85 billion monthly bond-buying program.
The Fed issues its statement at 2 p.m. Eastern time, and there is no press briefing with Chairman Ben Bernanke this month. Fed watchers do say the Fed could tweak its view on the economy, to show the uncertainty that has resulted after the government shutdown.
Traders also will be more focused than usual on the 8:15 a.m. ADP private sector employment report, expected to show 150,000 private sector jobs were added in October, slightly weaker than the 166,000 added in September. The government's monthly employment report usually follows ADP within two days, but because of the government shutdown, the October jobs report will be delayed until Nov. 8.
"The perception of the accuracy of ADP has increased, so I think the market might be paying more attention to it," said Ian Lyngen, senior Treasury strategist at CRT Capital. "It's the most comprehensive early glimpse we have of employment in October. Any caveat about the impact of the government shutdown will be of note."
Employment is a key metric for the Fed, and the September jobs report was disappointing when it was released after a several week delay. Only 148,000 nonfarm jobs were created in September, and economists expect the government's October report to be weak due to the 16-day government shut down.
The Fed surprised markets after its September meeting, when it announced no change in its bond purchases, so every new employment report is important.
Knapp said historically the market has corrected when the Fed pulls back from easing, with an average 8 percent decline. "We basically pushed that correction into next year," he said.
The CNBC Fed Survey this week found that Wall Street now expects the Fed to maintain its current level of purchases of Treasury and mortgage securities until April.
"They're on hold until they can get a cleaner read from the data that's not distorted by government shutdown and they reassess where the economy stands," Lyngen said. "There is tail risk that the Fed does something more hawkish that the market is not prepared for. I would ascribe a very small probability but that's the one thing that could shock the market."
The Dow (^DJI) on Tuesday soared 111 points to 15,680, besting its Sept. 18 closing high and catching up with other indexes that had already set new highs. The S&P 500 (^GPSC) was up 9 at 1,771, and the Nasdaq (^IXIC) rose 12 to 3,952.
"We have this favorable set up where public and monetary policy are both generally improving. I think the economic outlook is generally improving as well," Knapp said.
He also said the market is now in a seasonally positive time. "There were only four fourth quarters since 1990 when the returns were negative," he said. The last time the market registered a loss in a fourth quarter was when the recession was in full swing in 2008.
"I don't see much to stop it now," Knapp said. He said he expects the upcoming budget negotiations in Washington to be less contentious and he does not expect the Fed to announce that it will taper its bond buying until March.
Jack Ablin, CIO of BMO Private Bank, said Fed officials may say something more hawkish to keep the markets thinking about tapering, even if they don't do it yet.
"My guess is they're going to take a more hawkish tone. I think they're going to have to get the idea of tapering in the future back in the system. I don't think they do it. I just think they have to talk about it again," he said.
But that should not stop stocks from moving higher. The S&P 500 "is about 10 percentage points above the 200-day moving average. This is a very good story. The most likely scenario is the market tends to gain 10 to 15 percent in the subsequent 12 months," said Ablin.
The Fed likes the animal spirits it is creating, he said. "What they want to do is have their monetary policy stimulate activity but they don't want to create a bubble in the meantime," he said.
Besides ADP, the delayed consumer price index for September is released at 8:30 a.m. There is oil and gasoline inventory data at 10:30 a.m.
There is also a big batch of companies reporting earnings. Before the bell, General Motors (GM), Chrysler, Comcast (CMCSA, CMCSK), Sanofi (SAN), Honda (HMC), Corning (GLW) and Booz Allen Hamilton (BAH) are among companies that will report.
Facebook (FB), Kraft Foods (KRFT), Allstate (ALL), MetLife (MET), Boston Beer (SAM) and Weight Watchers International (WTW) report after the close. Visa (V) also reports in the afternoon, with its first earnings release as a Dow component.