Midterm Election Results in Focus
On the economic front, we take something of a breather this week, even though Thursday morning brings up the October print for the Consumer Price Index (CPI). Q3 earnings season, while still heavy with new reports, is lighter on marquee names — although we will hear from The Walt Disney Co. DIS Tuesday afternoon. And world events don’t appear teeming with malice toward the stock market as a whole — unless you don’t count the midterm elections in the U.S., commencing tomorrow.
The markets rallied Friday, but it was a challenging week overall, especially on the tech-heavy Nasdaq, which fell -5.7% last week for its worst 5-day performance since January, when the bottom began to fall out for the markets overall. But this morning, pre-markets are up again, perhaps looking for a little equilibrium with another Fed meeting in December possibly bringing a fifth-straight jumbo interest-rate hike of 75 basis points (bps). The Dow is +100 points, the S&P 500 is +10 and the Nasdaq is +30 points.
Thursday’s CPI report for October is expected to rise month over month but come down slightly year over year. These year-over-year figures have become shorthand for inflation in general for this country, and headline of +8.2% in September is still prohibitively high. This is expected to drip down to +7.9% or so, but there’s always a chance we could see a more aggressive shift to the downside. Stripping out food and energy prices, the “core” read was +6.6% last time around, expected to trickle down to +6.5%. This is still magnitudes higher than optimum +2% inflation.
One thing making economists and analysts trepidatious about a pending downward cascade in inflation metrics like CPI is the mirror image of what they feared a year ago: that once these moves gain traction, they are difficult to slow down. A year ago, we were looking at core CPI prints of +4%, but by spring of 2022 we were at 40-year highs.
Thus, while we keep an eye on any significant downward shifts that may help the Fed cool its aggressive monetary policy, the immediate effect on the market might by one of fear more than relief: if our expected +7.9% core CPI year over year suddenly gives up a 6-handle, for instance, how easy will it be to put on the brakes before this read heads to +2% — and below?
The next catalyst in the market, however, may be the midterm elections. With widely differing agendas from both the Democratic and Republican parties and most polls within statistical dead-heats, it’s a real toss-up whether we will see a change of philosophy on Capitol Hill or not. Republicans taking both the House and Senate would decidedly take on a much different tone than we’ve seen over the past two years — and may begin commotion toward the 2024 presidential election. Both houses or just the Senate (more likely) staying in the hands of the party of the White House would perhaps keep the tone in Washington DC as it’s been of late.
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