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Stocks rally as America votes

Stocks rose Tuesday as investors buckle up for the final outcome of the US midterm elections.

The S&P 500 (^GSPC) rose 0.63%, or 17.22 points. The Dow (^DJI) advanced 0.69%, or 175.21 points to its highest closing price in three weeks. The Nasdaq (^IXIC) rose 0.64%, or 47.11 points.

Voters will take to the polls today to determine who will fill the 435 seats in the House of Representatives and about one-third of open seats in the Senate. They will also decide on a slew of gubernatorial positions and ballot measures, which will affect the future of labor, health-care and cannabis regulations, among other areas.

But for the closely watched congressional races, the two major possible outcomes will be a move from a unified to a divided government or a continuation of the status quo, with Republicans comprising the majority in both houses of Congress and the executive branch. Markets have priced in the outcome of a “Blue Wave,” with Democrats flipping the House. FiveThirtyEight’s most recent election forecast Tuesday points to an 88% chance of Democrats winning control of the House.

But the final outcome is still far from certain, many analysts said.

“Investors around the U.S. are bracing for the unexpected heading into the midterm elections, wary of being caught wrong footed as many were after the 2016 presidential election, Brexit and other crucial votes over the years,” Dave Lutz, an analyst at Jones Trading, said Tuesday.

A so-called Blue Wave would cause a “government gridlock” where “no market-moving legislation is likely to pass through Congress,” Barclays analyst Aroop Chatterjee wrote in a note. This would mean there would likely be no new tax cuts and “roughly flat spending in real terms after 2019,” Goldman Sachs analyst Jan Hatzius said. “We would also expect fiscal deadlines to become more disruptive,” Hatzius added.

But a gridlock would not necessarily be negative for markets. Equity markets expect low volatility under a divided Congress, Chatterjee said. And an upside risk to a split Congress would involve President Donald Trump working with House Democrats and moderate Senate Republicans to push through a tax cut package for lower income earners or an increase in infrastructure spending, analysts from Capital Economics wrote in a note.

On the other hand, a scenario where the GOP retained both houses of Congress would likely be “risk positive” for the equity market and lead to further fiscal stimulus and tax cuts heading into the 2020 presidential election, Chatterjee added. Under a Republican Congress, Hatzius foresees a tax cut worth around 0.3% of GDP to be enacted mid-2019, which “might be partly offset by small spending cuts (0.1% of GDP).”

Though considered a less likely outcome, a situation with Democrats taking both the House and Senate “would likely lead to negative sentiment in US equities as Democrats focus on health-care and, potentially, impeachment proceedings/new investigations,” Chatterjee said.

Early states including Kentucky and Indiana, where polls close at 6pm, will provide initial indications of the outlook for the House and Senate majorities.

Traders work on the floor of the New York Stock Exchange (NYSE) near the close of market in New York, U.S., October 31, 2018. REUTERS/Brendan McdDermid

STOCKS: Facebook cracks down on suspicious accounts, Eli Lilly posts an earnings beat 

Facebook (FB) said in a blog post Monday that it blocked 115 accounts in advance of midterm elections. US law enforcement on Sunday notified the social media company of the accounts, which were believed to be linked to foreign entities. Facebook has recently been cracking down on “coordinated inauthentic behavior” to prevent a situation similar to the Cambridge Analytica scandal that rocked the company after the 2016 presidential elections. “Elections are a special case, an extremely important special case of the content and safety issues and security issues we face,” CEO Mark Zuckerberg said in a conference call with investors in late October.

Pharmaceutical company Eli Lilly (LLY) beat Wall Street’s estimates on the top and bottom lines in its third-quarter earnings report and posted improved sales of its newer drugs Trulicity and Taltz. The drugmaker doubled its quarterly profit from last year, rising to $1.15 billion or $1.12 per share from $555.6 million or 53 cents per share. The company also raised the low end of its full-year revenue guidance to between $24.3 billion and $24.5 billion. Eli Lilly’s CFO said that the company is considering more acquisitions similar to the $1.6 billion purchase of cancer drug maker Armo Biosciences earlier this year, Reuters reported. Shares of Eli Lilly fell 3.83% to about $106 per share as of market close.

CVS (CVS) beat on third-quarter earnings and revenue expectations in what will likely be its last report before closing its $69 billion purchase of health-insurance giant Aetna. Earnings per share came in at $1.73 on an adjusted basis, outpacing expectations of $1.71, while revenue was $47.3 billion versus $47.2 billion expected. Same-store sales, an important metric for retail locations, rose 0.8% in the third quarter. Shares of CVS rose 5.78% to $77.95 each as of market close.

NEWS: Oil dips into a bear market

Oil prices fell more than 2% on Tuesday, slipping to bear market levels. International Brent crude oil futures hit session lows of $71.18. Meanwhile, US West Texas Intermediate crude dropped to a session low of $61.31, down more than 20% from last month’s high of $76.90, which had been the highest level in nearly four years. This follows a tough October for crude oil, when WTI crude oil futures fell 14% from early October highs to post their worst monthly performance since July 2016. The Trump administration on Monday reimposed sanctions on Iran’s energy, banking and shipping industries, taking aim especially at Iranian’s key oil exports.

US crude output is forecast to increase to 12.06 million barrels per day in 2019, marking the most-ever increase in oil production, the Energy Information Administration wrote in its monthly Short-Term Energy Outlook. The EIA estimated that U.S. crude oil production averaged 11.4 million barrels per day in October.

Morgan Stanley cut its oil price target Tuesday to $77.50 from $85, citing factors including squeezed refining margins and weaker time spreads.

“Oil market fundamentals have softened. Supply continues to come in higher-than-expected, particularly from the US, Middle East OPEC, Russia and Libya,” Morgan Stanley analyst Martiijn Rats wrote in a note. “The market is well supplied, and we see a balanced rather than tight market ahead. This no longer supports our $85/bbl year-end and 1H19 forecast.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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