Overnight on Wall Street, the S&P 500 rose 1%, while the Dow Jones Industrial Average gained 1.3% and the Nasdaq rose 0.9%.
Analysts say many investors appear to be betting that Republicans will take control of at least one chamber of Congress. With a divided government, the attack is more likely than big, sweeping policy changes that could overturn tax and spending plans. And historically, when a Democratic White House has shared power with a divisive or Republican Congress, stocks have seen stronger gains than usual.
“The conventional wisdom that the stock market likes political gridlock is supported by the historical data in this case,” according to Lori Calvasina, head of US equity strategy at RBC Capital Markets.
Of course, that means a better-than-expected performance by Democrats in the midterm elections could hurt stocks. Investors may fear that Democrats emboldened in this scenario will push for more spending to help the economy. This, in turn, could be a sign that the Federal Reserve should raise interest rates further to control inflation.
A Republican victory would also introduce its own risks. It could reignite Republican sentiment around the nation’s debt limit and threaten another government shutdown, according to Morgan Stanley strategists.
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Either way, markets may have to wait a while for clarity due to the process of counting mail-in votes.
Meanwhile, Wall Street is awaiting a report due on Thursday, when the US government will show how bad inflation was across the country last month. And that will influence what has been the main driver of Wall Street this year, far more than politics: what the Federal Reserve does about interest rates.
Economists expect the report to show that the consumer price index was 8% higher in October than a year earlier, which would represent a slight slowdown from the 8.2% inflation rate of September
A fourth straight month of inflation moderation from June’s 9.1 percent rate could offer some relief. This trend line could also give the Federal Reserve room to loosen up a bit in its campaign to raise rates aggressively to force inflation down.
The Fed has said it may soon reduce the size of its hikes to half a percentage point, after pushing through four mega hikes of three-quarters of a point. Higher rates slow the economy by making it more expensive to buy a house, car or anything else on credit.
with AP
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