Stocks are on a tear.
Each of the three major indices closed higher by more than 2% on Wednesday, with the Dow gaining more than 500 points. This is the biggest post-midterm election advance for the S&P 500 and Dow since the session following the 1982 midterm elections, which saw about 4% increases for each of the two indices.
With Democrats flipping the House of Representatives and Republicans retaining the Senate, investors are waiting to see how congressional gridlock will play out for markets.
“It is too early to predict where policy will go but we are watching closely for any changes in policies that matter for markets,” said Torsten Slok, Deutsche Bank Chief International Economist. “What matters for markets is what will happen to trade policy, health care policy, immigration policy and fiscal policy.”
Stocks climbed higher Wednesday afternoon after President Donald Trump said during a press conference that he would be willing to work with Democrats on initiatives in these areas to help promote economic growth.
One announcement Wednesday that didn’t send ripples through the broader market was the resignation of Attorney General Jeff Session, which came following months of strain between the AG and Trump as special counsel Robert Mueller continues to investigate Russian meddling in the 2016 elections. As Jamie Cox, managing partner for Harris Financial Group, put it: “Markets had written him off already, so there was no surprise factor.” But cannabis stocks including Tilray (TLRY) , New Age Beverage (NBEV) and Canopy Growth Corporation (CGC) climbed on the news, as Sessions had been a vocal critic of pro-cannabis legalization.
Turning to Thursday, Federal Reserve policymakers will announce their latest decision on interest rates at 2 p.m. ET. Compared to September’s announcement, Thursday’s decision is expected to come and go without much fanfare. Most economists aren’t expecting another rate hike Thursday, and Chairman Jerome Powell won’t hold a press conference following the meeting.
The Labor Department will also release its weekly report on jobless claims Thursday morning. Economists are expecting to see 213,000 new unemployment claims, down from 214,000 from the week prior.
Meanwhile, earnings season continues with Disney (DIS) among the biggest names to report after the bell Thursday. The entertainment giant is expected to deliver earnings of $1.35 per share on revenue of $13.74 billion, according to Bloomberg data. With the bid for Sky now in the past, investors will be watching for results for Disney’s newer direct-to-consumer subscription streaming service ESPN+, which launched in April. Disney’s stock was up about 10% for the year-to-date at the close Wednesday.
Here’s what caught Yahoo Finance’s markets correspondent Myles Udland’s attention today…
Earnings and rates are once again the biggest story for markets
Now that the midterms are over, investors can put behind them an event that had been circled on the calendar as the year’s biggest political catalyst for markets.
The initial aftermath was positive for investors on Wednesday — U.S. stocks staged a huge rally with the Dow gaining more than 500 points to move back above 26,000 and the S&P 500 once again trading over 2,800 after a 2% gain for the benchmark index.
But for investors who perhaps saw the midterms as an event that could change the economic and earnings story for markets, the market’s internal struggle between great corporate results and higher interest rates will once again be the biggest story driving market action.
In February, and then again in March, and then again in October, higher interest rates were seen as a central part of the story about why the stock market came under quick, acute stress. Interest rates are not expected to be lower in 2019.
On Thursday, the Federal Reserve’s latest policy statement will see the central bank keep interest rates unchanged in a band of 2%-2.25%. In December, the Fed will raise rates for a fourth time this year. In 2019, then, it gets interesting, with Fed officials and Wall Street economists split on whether two, or three, or four (or more) rate hikes will be warranted next year.
But higher rates, a key part of the market story so far in 2018, are not going to go away in 2019 and could further stress markets going forward. Indeed, they already have.
Higher rates, however, come against the backdrop of a corporate sector that has seen blockbuster earnings growth and is outperforming expectations in the third quarter. Earnings growth is up 26% over last year through the end of last week, according to data from Credit Suisse. The firm also notes that fourth quarter and year-ahead revisions for earnings are outpacing their historical trends.
And although corporate earnings growth is expected to slow down in 2019 as the one-time profit boost from Trump’s tax cut is lapped, earnings growth of 10% still suggests a corporate sector that is holding up quite well. Even amid talk of tariff and inflation pressures.
“Many have characterized corporate guidance as problematic and the source of market weakness,” Credit Suisse’s Jonathan Golub wrote in a note last week. “This appears inconsistent with the data.”
And so it is this tension — between higher rates investors see as a headwind for stocks and corporate earnings that provide the underpinning of strong returns — that has defined markets this year will define them going forward.
Even if the election, for a time, made it seem like that might not be the case.
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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