The outcome of the midterm election on Tuesday will define the agenda for the next Congress. This could imply changes to fiscal policy, which influences a country’s economy through taxes and government spending.
However, when it comes to the stock market, this election ranks quite low on the list of issues that investors should be concerned about. The economy and business profitability will have a greater impact on portfolios than congressional seats.
What’s going on: Markets prefer divided governance, which will almost certainly lead to an impasse. This is due to the fact that dividing power in Congress or between Congress and the executive branch minimizes the chance of broad legislation that could cause uncertainty for businesses but stocks to have a bigger challenge than who wins control of the House or Senate: the prospect of a recession. And the extent and duration of this will decide the market’s trajectory.
In a note, Goldman Sachs analysts stated, “Inflation, monetary policy, recession risk, and geopolitics have been considerably more important drivers of equities market moves than the potential for moderate adjustments in US fiscal policy.” Politics has played a less prominent part in recent discussions with investors than in previous election cycles, they added.
They emphasized that high levels of government debt, inflation, and rising interest rates will certainly overshadow the economic benefit of any prospective fiscal stimulus enacted by Congress.
It’s all about the Fed: Inflation continues around 40-year highs, and keeping price hikes in check is part of the Federal Reserve’s mandate. The market will be mainly concerned with monetary policy, which includes interest rate control.
“While voters retain ultimate political power, the trajectory of the economy for the next several years is almost exclusively in the hands of the Fed and its harsh instruments to manage inflation and boost employment,” wrote Christopher Smart of the Barings Investment Institute in a note.
The main message is that investors should look to the Fed, not Congress, for the next big market catalyst.
And the Fed’s next move will very certainly be dictated by economic statistics revealed between now and December, when the central bank holds its next policy meeting. The Consumer Price Index data, an essential inflation barometer, is due out on Thursday.
In terms of the midterm elections, investors may be content with the ultimate results. The stock market despises uncertainty.
“We expect the election to have a favorable influence on the market, partially because we’ll have it behind us,” said LPL Financial’s Barry Gilbert and Jeffrey Buchbinder. “However, the policy impact is anticipated to be minor, and market participants will remain focused on central bank policy and inflation.”
The crypto-chaos persists.
On Tuesday, shockwaves shook the crypto industry when one of the main exchanges for digital currencies, which was in the throes of a liquidity crisis that unsettled digital assets and triggered contagion fears, was bailed out by a rival exchange.
Binance, the world’s largest cryptocurrency exchange, announced the acquisition of FTX, a smaller rival that has struggled to respond to a liquidity run caused by the declining price of Bitcoin and other currencies.
According to my colleague Allison Morrow, the statement surprised crypto investors because a merger of the two largest crypto exchanges by volume would represent a tectonic power shift in the industry.
“I’m truly stunned,” a senior industry executive said during an interview. “FTX failing… would be similar to a Lehman Brothers disaster in the space.” But if they’ve been successfully bailed out, it’ll probably put a stop to things.”
Binance and FTX did not immediately share information regarding the transaction, stating that the two parties were negotiating it in real time.
The announcement caused a brief rally in digital assets, but it was insufficient to calm worried investors.
According to CoinDesk, Bitcoin fell more than 10% on Tuesday, reaching a 52-week low of roughly $17,600. FTT, FTX’s in-house coin, plummeted, losing 85% of its value. Other digital assets and equities associated with the industry, such as Coinbase, have also declined.
The EU has launched a more thorough investigation of the Microsoft transaction.
According to my colleague Brian Fung, the European Union is looking into Microsoft’s proposed $68.7 billion acquisition of video game giant Activision Blizzard, citing fears that the merger could harm competition in the video game sector.
According to an EU news statement, a preliminary evaluation of the deal discovered that Microsoft (MSFT) may try to withhold the games it is acquiring from other distributors. Microsoft will become the world’s third-largest video game publisher as a result of the planned acquisition, controlling popular properties such as “Call of Duty” and “World of Warcraft.”
“Such foreclosure techniques may reduce competition in markets for the distribution of console and PC video games, resulting in higher pricing, worse quality, and less innovation for console game distributors, which may be passed on to consumers,” the EU warned.
The further investigation, which could last until March of next year, is also motivated by concerns that the acquisition could entrench dominance in Microsoft’s Windows operating system at the expense of competition if Microsoft tries to make its PC games exclusive to Windows.
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