‘Zombie Economy’ May Give Markets a Scare in October

Traders expect October to give the markets a scare, starting with news on the economy and jobs in the week ahead.

After a surprisingly good performance in the third quarter, the thinking is the stock market is ready to pull back, especially after a few choppy sessions and a new batch of data that should continue to show a slow-moving, ‘zombie like’ economy. (Read More: September Bad for Stocks? Why It’s Different This Time)

Stocks logged the best third quarter performance since 2010. For the quarter, the Dow [.DJI  13437.13    -48.84  (-0.36%)   ] surged 4.32 percent and the S&P 500 [.SPX  1440.67    -6.48  (-0.45%)   ] soared 5.76 percent.

The coming week could provide plenty of excuses to take profits, beginning with Monday’s ISM manufacturing data, again expected to show weakness in the sector.

Manufacturing reports from China, over the weekend, and from Europe, also Monday, will provide a look at just how sluggish global activity has become. (Read More: Stocks to Ward Off China Slump?)

Friday’s jobs report is expected to show the low level of job creation continued in September, after August’s 96,000 nonfarm payrolls. The U.S. election is also a focus this week, with the first presidential debate in the tight race Wednesday evening.

“I think the overarching thing is it’s the new quarter. What’s it mean? Did we experience any window dressing? It doesn’t feel like it to me,” said Art Hogan of Lazard Capital Partners. “To me, there’s more downside risk than upside risk.”

“I’m not sure what the catalyst is going to be, but we’re due,” said Hogan. (Read More: S&P 500 to Hit Record High in 2013—Strategist)

Counterbalancing the disappointing economic news has been the willingness of global central banks to take action, and the Fed’s quantitative easing program is expected to provide a floor for the market if it does start to correct.

Of interest will be Fed Chairman Ben Bernanke’s comments Monday on the economy before the Economic Club of Indiana. The European Central Bank also holds a rates meeting Thursday, and while it is not expected to act, ECB President Mario Draghi will hold a briefing afterwards.

“Because of quantitative easing and we know the Fed’s going to be doing QE for a while, I think that takes some of the sting out of the economic data,” said Marc Chandler, chief currency strategist at Brown Brothers Harriman. The Fed’s latest program is open ended and takes aim at the housing market, with the purchase of $40 billion in mortgage securities per month.

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