Stocks week ahead: How midterm options could affect Wall Street

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CNN Business
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Last week was volatile on Wall Street, with stocks falling after Federal Reserve Chairman Jerome Powell dashed the market’s hopes. loop and suggested that larger rate increases they are probably coming. But Wall Street is still pinning its hopes on Washington.

Investors are betting on a big Republican wave midterm elections. if Republicans take at least one house of Congress That’s likely to result in more gridlock in Tuesday’s midterm elections, which the market usually favors.

according to Data from Edelman Financial Engines, the S&P 500 has returned 16.9% annually since 1948 during the nine years that a Democrat was in the White House and Republicans held majorities in both houses of Congress. That’s 15.1% during periods of full Democratic control and 15.9% during years of unified GOP government.

Investors are very happy when politicians argue but don’t actually pass new laws that could hurt corporate profits.

An example of this is taxes from enterprises.

“What do interim assessments mean for markets? If Republicans take over the House, the tax hikes are dead in the water,” said David Wagner, portfolio manager at Aptus Capital Advisors. Republicans may be less likely to approve windfall tax on profits of oil companies and are generally not in favor of tax increases for the wealthy.

The market is also betting that some sectors could get a boost — even if Republicans take control of the House or Senate, possibly making it harder for President Biden to pass legislation.

That’s because there are some areas of consensus for the White House and Republican lawmakers.

“The GOP sweep could lead to more defense spending,” Wagner said. “Increasing the defense budget seems to be a bipartisan issue.” The house passed a record high defense budget proposal this summer.

Biden and Republicans appear to be on the same page when it comes to increasing infrastructure spending. That could boost utilities, construction companies and some real estate stocks. Congress passed more than once A $1 trillion bilateral infrastructure project President Biden defended it last year. But it is not yet clear what the appetite for more spending is… even if there is a consensus that more is needed.

“Everything is politically polarized, but there are common views on infrastructure. Even so it was [Donald] Trump and [Hillary] Clinton in 2016,” said Jim Lydotes, deputy chief investment officer for equities at Newton Investment Management. “As a country, we have underinvested in infrastructure. This is an area where there is a lot of agreement.”

Of course, there is no guarantee that Biden and other Democratic leaders will be able to work effectively with Republicans in Congress. After all, with the midterms in the rearview mirror, the political narrative will quickly shift to the 2024 presidential race. Congress and the White House could spend more time strife rather than trying to legislate.

A divided government could also have some significant drawbacks, especially if fears of a recession materialize next year.

Rob Dent, chief U.S. economist at Nomura Securities International, said the federal government could spend less on social safety net programs if Republicans take control of Congress.

“All things being equal, this can lead to a longer recovery than a recession,” Dent said. That would be bad for stocks in general, as consumer spending drives corporate profits.

Dent added that there is an unwelcome possibility of more debate in Washington over the debt ceiling. The last time it was a big issue was during President Barack Obama’s first term. USA lost its precious perfect AAA credit rating As a result of the debt ceiling drama from Standard & Poor’s. The the stock market lost more than 5% After the August 2011 crash.

“The outcome of this election is less about what won’t be done than what can be done to help the economy during a recession,” Dent said. “We are concerned about a divided government leading to a cliff on the debt limit and the potential for a government shutdown. We haven’t dealt with it for a while.”

But at the end of the day, political headlines are often just noise for the markets. Anthony Saglimbene, chief market strategist at Ameriprise, said on a conference call last week that stocks historically rise after elections, regardless of which party controls the White House and Congress.

Midterm exams can take a backseat to other macro issues. Saglimbene noted that “growth, earnings, inflation and interest rates” matter more to investors over the long term. He acknowledged that the election results could cause more near-term volatility, but the market is already pricing in a high probability of a split government.

Given that inflation is not transitory as Fed Chairman Powell has predicted for most of 2021, politically motivated market and economic volatility is the last thing consumers, investors or the Fed need.

Clearly, high prices for commodities and other raw materials, shipping and other transportation costs, and labor costs are not going away anytime soon.

Steve Cahillane, CEO of cereal and snack food giant Kellogg

(K)even saying in the company’s most recent earnings call last week that “the idea that inflation is going to be temporary is always patently ridiculous.”

We’ll get a better idea of how sustainable inflation is on Thursday after the government reports September’s consumer price index (CPI) figures.

Economists polled by Reuters forecast that overall prices rose 0.7% last month, compared with a 0.4% increase in September. This is likely to further push up annual prices, which rose 8.2% in the last 12 months to September. Continued strength in the job market will also put more pressure on prices.

“The labor market is resilient and inflation is spilling over into the services sector,” said Troy Gayeski, chief investment strategist at FS Investments.

This could lead to further concern that the economy could be headed for a so-called stagflationary environment, a period of stagnant growth alongside high inflation. If that happens, the Fed will keep interest rates higher for longer.

“We will eventually get out of this inflation/stagflation situation,” Gayeski said. “But it’s not like the Fed is going to cut rates to zero anytime soon. It will be really prudent.”

Monday: China trade data; Earnings from BioNTech

(BNTX)Take-Two

(TTWO)Ryanair

(RYAAY) and Lyft

(LYFT)

Tuesday: US midterm elections; Profit from DuPont

(DD)Norwegian Cruise Line

(NCLH), Lordstown MotorsDisney

(DIS)Western Petroleum

(OXY)News Corp

(NWS)IAC

(IAC)AMC

(AMC) and Novavax

(NVAX)

Wednesday: China inflation data; Profit from DR Horton

(DHI)Weibo

(WB)Hanesbrands

(HBI)Capri Holdings

(CPRI), robloxSea world

(THE SEAS)Wendy’s

(WEN)Redfin

(RDFN) and Beyond Meat

(BYND)

Thursday: US CPI; US weekly jobless claims; Profit from Nio

(NIO)Ralph Lauren

(RL)Tapestry

(TPR), We are workingSix flags

(SIX)Yeti

(YETI) and Warby Parker