Stocks were mixed Monday as the equity market braces for a potential congressional shake-up following the US midterm elections.
The S&P 500 (^GSPC) rose 0.56%, or 15.26 points, at market close, while the Dow (^DJI) advanced 0.76%, or 190.87 points. The Nasdaq (^IXIC) fell 0.38%, or 28.14 points, as shares of tech heavyweights Apple (AAPL) and Amazon (AMZN) declined.
On Tuesday, voters will take to the polls to determine the split of power in Congress. All 435 seats in the House of Representatives and about a third of the seats in the Senate are on the table.
Markets have priced in a baseline view of a “Blue Wave,” with Democrats taking the House and the GOP retaining the Senate. Such a split would result in a “government gridlock” where “no market-moving legislation is likely to pass through Congress,” Barclays analyst Aroop Chatterjee 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. And 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.
The equity market tends to rally following a midterm election, but the extent of the gains depends on whether a change of majority takes place – especially in the House of Representatives, which carries implications for US social and economic structure, Fundstrat Global Advisors analyst Thomas Lee wrote in a note. Since 1836, if the House majority see-saws, the average gain the year following was 1.9%, versus 14.3% if the House majority remains unchanged, Lee wrote.
But longer-term implications aside, in the days to come, an uncertain future would be even more of an overhang for equity markets, RBC Capital Markets’s Lori Calvasina wrote in a note. If some races are too close to call Tuesday night and control of Congress remains uncertain, “it could weigh on an equity market that has already felt fragile,” Calvasina said.
“The best example we have of this in recent history is the 2000 election when both the Presidency and control of Congress were unresolved for roughly a month,” Calvasina added. “At the time, the equity market was already tumbling, and it continued to fall while the results were being determined.”
NEWS: Trump administration rolls out sanctions on Iran, Xi Jinping promotes globalism
The Trump administration reimposed sanctions on Iran that had previously been lifted as part of the 2015 nuclear agreement in a move to pressure Tehran to slow its alleged missile and nuclear programs. Iranian President Hassan Rouhani vowed to sell oil and break the sanctions, which took effect Monday and hit Iran’s energy, shipping and banks took effect Monday. Countries still part of the nuclear pact including the UK, Germany France opposed the sanctions and said they wanted to take measures to help curb the negative impacts on companies doing legitimate business with Iran. Meanwhile, the US will temporarily allow eight countries to continue importing Iranian oil, Secretary of State Mike Pompeo said on Friday.
President Xi Jinping took aim at protectionist policies and promised to cut import tariffs and open the Chinese economy at the country’s International Import Expo in Shanghai on Monday. He pledged to import $30 trillion of goods over the next 15 years – up from $24 trillion from his previous estimates – and promised to speed up trade discussions with the EU, Japan and Korea, while reiterating policy initiatives at cutting tariffs largely in line with previous promises. Xi’s speech follows uncertainty around the future of the US-China trade relationship. Trump told reporters Friday he thinks the US could reach a trade deal with China, while top White House economic adviser Larry Kudlow downplayed the notion of a speedy agreement between the two countries. Trump and Xi are expected to meet in a one-on-one at a Group of 20 summit in Argentina later in November.
STOCKS: Berkshire Hathaway repurchases $928 million in own stock
Berkshire Hathaway (BRK-A, BRK-B) purchased $928 million in Class A and B common stock in the third quarter under a new policy giving Chairman and CEO Warren Buffet more flexibility to determine best timing to repurchase shares, the company reported Saturday. The company also reported it had nearly doubled its operating profit to $6.88 billion in the third quarter from $3.44 billion during the year-ago period, lifted by insurance underwriting income and a stronger tax set-up. The stronger-than-anticipated results prompted price target boosts from firms including Barclays and UBS.
Apple’s (AAPL) stock continued to sell off Monday after the company issued weak earnings guidance last week, sparking multiple downgrades from analysts. Rosenblatt Securities downgraded shares of Apple to Neutral from Buy on Monday, with analyst Jun Zhang citing “weaker than expected sell-through and production reductions for iPhone XS/XR.” Zhang reiterated a $200 price target. This follows a similar move from Bank of America Merrill Lynch last week, with analyst Wamsi Mohan downgrading Apple to Neutral from Buy and lowering his price target to $220 from $235. Apple’s stock fell 2.84% to $201.59 each at the end of trading, and shares dipped below $200 each during intraday trading for the first time since early August.
Amazon (AMZN) is said to be splitting its second headquarters between two cities, diverging from its original plans to set up a single HQ2, the Wall Street Journal reported Monday. The e-commerce giant narrowed its list of finalists to 20 earlier this year, and the WSJ reported Sunday that the company was in late-stage talks with locations including Crystal City in Virginia, Dallas and New York City. The Seattle, Washington-based company first announced its HQ2 project in September 2017 and said it expected to invest over $5 billion in construction and create as many as 50,000 high-paying jobs for the second headquarters. Shares of Amazon fell 2.27% to $1,627.80 at market close after spending the trading day in the red.
ECONOMY: US service sector expands at faster-than-expected pace in October
Growth in the US services sector rose to a faster-than-anticipated pace in October. IHS Markit’s US Services Business Activity Index came in at 54.8 in October, rising above the 53.5 reading in September and exceeding expectations of 54.6, according to data compiled by Bloomberg.
“A rebound from a weather-torn September and strong demand propelled service sector growth in October,” Chris Williamson, chief business economist at IHS Markit, said in a statement. “Combined with the steady output growth being recorded in the manufacturing sector, the survey data suggest the economy grew at its fastest rate since July.”
The final IHS Markit composite Purchasing Managers’ Output Index picked up to 54.9 in October from 53.9 in September, buoyed by expansion in manufacturing and services sectors.
The Institute for Supply Management’s non-manufacturing activity index slipped 1.3 points to 60.3 in October, according to a report Monday. A reading above 50 points to expansion in the non-manufacturing sector, which comprises more than two-thirds of economic activity in the US. Additional readings for new orders, employment and business activity and production also each pointed to growth at a slower pace in October from September.
“The non-manufacturing sector has again reflected strong growth despite a slight cooling off after a record month in September,” ISM wrote in a statement. “There are continued concerns about capacity, logistics and tariffs. The respondents are positive about current business conditions and the economy.”
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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