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Stocks week ahead: How the midterms could affect Wall Street

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A version of this story first appeared in CNN Business’s Before the Bell newsletter. Not a subscriber?can sign up Here.

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Last week was a volatile week on Wall Street. Federal Reserve Chairman Jerome Powell’s shares fell after he dashed market dreams. pivot and suggested that even bigger rate hikes may be coming. But Wall Street still has its hopes in Washington.

Investors are betting on the Republican big wave midterm elections. If Republicans take at least one House of Congress Tuesday’s midterm elections could create more deadlocks than the market usually likes.

according to Data from Edelman Financial Enginesthe S&P 500 has had a 16.9% annualized return since 1948, when Democrats were in the White House and Republicans had a majority in both houses of Congress. 15.1% in the period, compared to 15.9% in years when there was a United Republican government.

Investors rejoice when politicians bicker, but they don’t actually enact new laws that can hurt corporate profits.

One example is corporate taxes.

“What will the midterm elections mean for the markets? If Republicans win the House, tax increases will sink into the water,” said David Wagner, portfolio manager at Aptus Capital Advisors.Republicans may be less likely to approve A surprise tax on oil company profits And I’m generally not in favor of raising taxes on the wealthy.

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

That’s partly because there’s a consensus between the White House and Republican lawmakers.

“A Republican sweep could lead to an increase in defense spending,” Wagner said. “Increasing the defense budget appears to be a bipartisan issue.” House passed Best defense budget ever this summer.

Biden and Republicans also appear to be on the same page when it comes to spending more on infrastructure, which could boost utilities, construction companies and some real estate stocks.Congress has passed more than $1 Trillion Bipartisan Infrastructure Bill After all, last year President Biden endorsed. But even if there is a consensus that more spending is needed, it is not yet clear what the desire for more spending is.

“Everything is politically polarized, but there is a common ground in infrastructure. [Donald] with playing cards [Hillary] Jim Lidortz, Deputy Chief Investment Officer, Equities, Newton Investment Management, said: “As a country, we are not investing enough in infrastructure. It is an area where there is a lot of agreement.”

Of course, there is no guarantee that Biden or any other Democratic leader will be able to work effectively with Republicans in Congress. After all, with the midterm elections in the rearview mirror, the political narrative will quickly shift to his 2024 presidential campaign.Congress and the White House may spend more time quarrel Than try to pass a bill.

Also, a divided government may have some serious drawbacks. Especially if fears of a recession come true next year.

Rob Dent, senior U.S. economist at Nomura Securities International, said a Republican takeover of Congress could cut federal spending on social safety net programs.

“All else being equal, the recovery from the recession could be longer,” Dent said. This is generally bad for stocks, as consumer spending drives corporate profits.

Dent added that there could be more debate in Washington over the debt ceiling. The last time it became a big issue was during President Barack Obama’s first term.America I lost my precious perfect AAA credit rating From Standard & Poor’s as a result of the debt ceiling drama.of Stock market falls more than 5% After the downgrade in August 2011.

“This election result is more important than what we can or cannot do to help the economy during a recession,” Dent said. “We worry that a split government will lead to a brink about debt ceilings and possible government shutdowns. We haven’t had to deal with that for quite some time.”

But at the end of the day, political headlines are often just market noise. Anthony Saglimbane, chief market strategist at Ameriprise, said on a conference call about the midterm elections last week that historically stocks have risen after elections, no matter which party controls the White House and Congress.

The midterm elections could also be “backwards” to other macro issues. Saglimbene noted that “growth, earnings, inflation and interest rates” are more important to investors in the long run. He acknowledged that the election results could increase short-term volatility, but admitted that the market had already priced in a likely government split.

Given that inflation has turned out to be more than temporary, as Fed Chairman Powell predicted for much of 2021, politically-induced market and economic volatility is likely , or the last thing the Fed needs.

It is clear that the rising cost of goods and other raw materials, transportation and other transportation costs, and labor costs will not go away anytime soon.

Steve Cahirane, CEO of cereal and snack giant Kellogg’s

even said in the company’s most recent earnings call last week that “the idea that inflation will be temporary is always plainly ludicrous.”

We will have a better idea of ​​how persistent inflation is on Thursday after the government releases its September consumer price index (CPI) figures.

Economists polled by Reuters expect overall prices to rise 0.7% last month, up from a 0.4% gain in September. This could also push the year-over-year price higher, which saw him up 8.2% in the last 12 months through September. Continued strength in the job market will also put further pressure on prices.

“The labor market is resilient and inflation is spreading to the services sector,” said Troy Gajeski, chief investment strategist at FS Investments.

This could raise concerns that the economy is heading towards a so-called stagflation environment. If that happens, the Fed may hold interest rates longer.

“Ultimately, we’re going to get out of this inflation/stagflation situation,” said Geyski. “But the Fed is not going to cut interest rates to zero anytime soon.

Monday: China trade data; earnings from BioNTech

take 2


and lift


Tuesday: U.S. Midterm Elections; Earnings from DuPont

Norwegian Cruise Line

, rosetown motorsDisney

Occidental Petroleum

News Corp.



and Novavax


Wednesday: Chinese inflation data. Earnings from DR Horton


Hanes Brands

Capri Holdings

, robloxSea World



and beyond flesh


Thursday: US CPI; US Weekly Unemployment Claims.Earnings from Nio

Ralph Lauren


, we workSix Flags


When warby parker

Friday: US bond markets are closed for Veterans Day. UK GDP; Michigan US consumer sentiment;Softbank earnings


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