The week has witnessed a bull run as stock markets kept the momentum for three straight days ahead of the midterms. Investors waited in bated breath as the outcome of the elections could impact public spending and inflation control. The S&P increased by 0.56%, Dow Jones by 1.02%, and Nasdaq Composite by 0.49% to reach 3,828.11, 33,160.83, and 10,616.20, respectively.
Historically, the markets usually gain as the year ends, which continues for 12 months after the elections. At this time, the investors are typically keen to observe any signs of clarity of market and government policies. A Democratic win in both houses could weigh heavily on equities as traders expect increases in corporate taxes.
Midterm Implications
To the surprise of pollsters and analysts, the midterms delivered some good news for the Democrats, which is unusual at the half-mark to presidential elections. Despite the low approval ratings and runaway inflation for the Biden administration, the Republicans are not too sure they will flip the senate.
Nonetheless, they appear likely to win over the control of the House with a minor swing. It’s a remarkable achievement since they’ve had attacks left, center, and right regarding the state of the economy. On the other hand, the Democrats have notched certain legislative achievements after the Supreme Court delivered its judgment on citizens’ right to abortion.
Tax Implications
The market is betting on various sectors that could seem favorable if the Republicans take over the control of the senate and could make it difficult for the Biden administration to pass some laws.
If this happens, the tax hikes could be dead in the water, as noted by analysts. Republicans may not approve the proposed windfall tax on oil company revenues. Also, they may not vote in favor of tax increases on the rich.
Gridlock May Not Be Good After All
Whereas the final midterm elections’ results may take days or weeks to be known, candidates from the Republic and Democratic parties are already in celebration moods over their historic victories.
Stock market analysts are anticipating Republicans to win back the House of Representatives and the senate as results started streaming in on Tuesday. Past events have shown that investors prefer gridlock and divided congress as this will clip off the government’s power to spend, increase taxes, or develop new regulations.
There’s no guarantee that Republicans and Democrats will have a truce in the senate. After all, the 2024 presidential elections are only two years away, and politicians may spend a lot of time bickering. Economics expects a reduction in government spending on social security programs should Republicans control the progress.
Rising Inflation and CPI Data Release
Already, the economy is going through runaway inflation, and there’s still a long road to recovery. The CPI data is expected to be released this Thursday, and the Fed may raise the cash rate in December to curb inflation.
If politicians take a back seat on macroeconomic issues, interest and inflation rates may remain high, which could hurt the investment portfolios of Americans. Additionally, consumers taking out loan facilities such as mortgages, lines of credit or credit card have faced high rates this year due to increased fed rates.
The last thing that Americans want is politically-induced economic and market volatility. Signs show that high inflation or rising prices of commodities and other related costs will be around for a while.
The CPI figures could give a clear picture of how terrible inflation is and whether there’s hope for a reduction anytime soon. Economists predict overall prices to increase by 0.7%, up from a 0.4% rise a month earlier. This could push year-to-year(Y-Y) prices even higher.
Labor Market Outlook
The labor market is still very tight, which could continue putting pressure on the prices and keep the Fed hawkish. The Fed is anticipating that the unemployment rate may climb to 3.8% by the end of the year and 4.4% in 2023. Despite this outlook, weekly unemployment claims fell to 217,000 despite increasing interest rates.
Crypto Market Not Looking Good
Cryptocurrency prices fell Tuesday after FTX and Binance agreed to merge to fix the current liquidity crunch. As a result, Bitcoin closed at $17,300.80, the lowest price since November 2020.
However, things took a turn on Wednesday after Binance backtracked on its decision to merge with FTX. The crypto prices tumbled for a second day straight, with Bitcoin plunging to $16,084, according to data from Coindesk. Ethereum also fell 13%.
Uncertainty Won’t Go Away
As the Fed keeps the rate higher for much longer, there are fears that the economy may stagnate at some point. It’s yet to be discovered when the economy will exit the inflationary state or if the Fed will cut rates back to their initial points.
I am Joyce Corbett and I have been working in the news industry for over 10 years. My current role is as an author at World Stock Market, where I focus primarily on the tech section. My specialty is creating engaging content that helps to explain and demystify complex financial topics.
