Wall Street bets on Tuesday’s midterm elections to see a red wave. It appears that this didn’t occur. Investors saw red on Wednesday’s trading screens.
The Dow fell more than 645 points or 2%, as stocks ended the day broadly lower. Merck (MRK), the Dow’s only stock, finished Wednesday higher…but barely. S&P 500 fell 2.1%, while Nasdaq dropped 2.5%.
One stock, which had been rising in anticipation of a huge victory for the GOP, was hit hard Wednesday.
Digital World Acquisition Corp. (or SPAC), a blank check, special-purpose acquisition company or SPAC that is looking to merge with the media company of former President Donald Trump, plunged around 20%. The stock had risen more than 65% by Monday.
After a record-breaking October stock market surge, the market rallied strongly over the last three days. This was partly due to investors’ expectations of a convincing win for Republicans, which could give them control of either one or both of Congress.
However, it is not clear whether Democrats will lose their majority in either of the chambers.
“The market expected a completely different outcome. Investors may be disappointed that the Biden administration won’t be held accountable,” stated Brian Gardner, chief Washington policy strategist at Stifel. “There will be gridlock but there will also be confusion and lack of clarity.”
As long as inflation is in focus, gridlock isn’t too bad
Gardner stated that there is little chance that any new meaningful stimulus bills will be passed between now 2024 and the presidential elections in 2024, even if the economy falls into recession. The best the market can hope for is that Washington can pass the federal budget and avoid more drama over lifting the debt ceiling.
Gardner stated that “The parties don’t see it as in their best interests to cooperate.”
This may not be the best news for the long term.
Callie Cox, eToro’s US investment analyst, stated that “Right now, you want Washington to make decisions quickly, in an environment of slowing growth, and concerns about a rising recession.”
Investors may shift their focus to the economy and inflation as the midterm dust settles. Thursday morning will see the release of October consumer price index numbers by the government.
Economists predict that the CPI will rise 8% over the past twelve months. This is still a high level, but it would be a small decrease from September’s 8.2% increase.
Investors hope that inflation will continue to fall and the Fed can slow down the rate of interest rate increases after four consecutive increases of three-quarters of a percentage point.
Investors should therefore be more concerned about the economy and corporate earnings, especially as history has shown that stocks tend to rise after elections, regardless of which party is in control.
Kevin Green, the senior researcher at Dimensional Fund Advisors, stated that while elections are an important piece of the puzzle, it is only one factor. “Markets have performed remarkably similarly during periods when Congress was Republican- or Democratic-controlled.”
There are still concerns about the possibility of lower profits as the economy slows. Following weak results, shares of Disney (DIS), Roblox gaming company, and Lucid electric vehicle startup plunged between 13% to 21%.
Meta Platforms, Facebook’s owner, confirmed another round of layoffs…but the stock rallied over 5% following the news.